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Working Paper
Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads
Garlappi, Lorenzo; Benzoni, Luca; Goldstein, Robert S. (2019-09-02)
We propose a tractable model of a firm?s dynamic debt and equity issuance policies in the presence of asymmetric information. Because ?investment-grade? firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the ?asymmetric information channel? can generate jumps to default (from the creditors? perspective) only for those "high-yield" firms that have exhausted their ability to borrow. ...
Working Paper Series , Paper WP-2019-8

Working Paper
COVID-19 and SME Failures
Penciakova, Veronika; Kalemli-Ozcan, Sebnem; Sander, Nick; Gourinchas, Pierre-Olivier (2020-12-03)
We estimate the impact of the COVID-19 crisis on business failures among small and medium-size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Accommodation and food services; arts, entertainment, and recreation; education; and other services are among the sectors most affected. The SME jobs at risk due to business ...
FRB Atlanta Working Paper , Paper 2020-21

Report
Fiscal Unions Redux
Pastorino, Elena; Kehoe, Patrick J. (2017-02-21)
Before the advent of sophisticated international financial markets, a widely accepted belief was that within a monetary union, a union-wide authority orchestrating fiscal transfers between countries is necessary to provide adequate insurance against country-specific economic fluctuations. A natural question is then: Do sophisticated international financial markets obviate the need for such an active union-wide authority? We argue that they do. Specifically, we show that in a benchmark economy with no international financial markets, an activist union-wide authority is necessary to achieve ...
Staff Report , Paper 543

Working Paper
Forecasting credit card portfolio losses in the Great Recession: a study in model risk
Canals-Cerda, Jose J.; Kerr, Sougata (2014-03-31)
Credit card portfolios represent a significant component of the balance sheets of the largest US banks. The charge?off rate in this asset class increased drastically during the Great Recession. The recent economic downturn offers a unique opportunity to analyze the performance of credit risk models applied to credit card portfolios under conditions of economic stress. Specifically, we evaluate three potential sources of model risk: model specification, sample selection, and stress scenario selection. Our analysis indicates that model specifications that incorporate interactions between policy ...
Working Papers , Paper 14-10

Working Paper
Credit Ratings, Private Information, and Bank Monitoring Ability
Nakamura, Leonard I.; Roszbach, Kasper (2016-06-16)
In this paper, we use credit rating data from two large Swedish banks to elicit evidence on banks' loan monitoring ability. For these banks, our tests reveal that banks' internal credit ratings indeed include valuable private information from monitoring, as theory suggests. Banks' private information increases with the size of loans.
Working Papers , Paper 16-14

Working Paper
The Bank as Grim Reaper : Debt Composition and Bankruptcy Thresholds
Gordy, Michael B.; Carey, Mark S. (2016-07-06)
We offer a model and evidence that private debtholders play a key role in setting the endogenous asset value threshold below which corporations declare bankruptcy. The model, in the spirit of Black and Cox (1976), implies that the recovery rate at emergence from bankruptcy on all of the firm's debt taken together is increasing in the pre-bankruptcy share of private debt in all debt. Empirical evidence supports this and other implications of the model. Indeed, debt composition has a more economically material empirical influence on recovery than all other variables we try taken together.
Finance and Economics Discussion Series , Paper 2016-069

Discussion Paper
Lehman's Bankruptcy Expenses
Sarkar, Asani; Denison, Erin; Fleming, Michael J. (2019-01-15)
In bankruptcy, firms incur expenses for services provided by lawyers, accountants, and other professionals. Such expenses can be quite high, especially for complex resolutions. These direct costs of bankruptcy proceedings reduce a firm’s value below its fundamental level, thus constituting a “deadweight loss.” Bankruptcy also carries indirect costs, such as the loss in value of assets trapped in bankruptcy—a subject discussed in our previous post. In this post, we provide the first comprehensive estimates of the direct costs of resolving Lehman Brothers’ holding company (LBHI) and ...
Liberty Street Economics , Paper 20190115

Working Paper
Safe Collateral, Arm's-Length Credit : Evidence from the Commercial Real Estate Mortgage Market
Nichols, Joseph B.; Krainer, John; Black, Lamont K. (2017-05)
When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating ...
Finance and Economics Discussion Series , Paper 2017-056

Working Paper
Financial benefits, travel costs, and bankruptcy
Scholnick, Barry; Mikhed, Vyacheslav (2014-06-01)
We are the first to show that the cost of personal bankruptcy filers traveling to their bankruptcy trustees affects bankruptcy choices. We use detailed balance sheet, income statement, and location data from 400,000 Canadian bankruptcies. To control for endogenous trustee selection, we use the location of local government offices as an instrument for the location of bankruptcy trustees (while filers interact with trustees, and trustees interact with local government, filers do not interact with the local government). We find that increased travel costs reduce the number of filings. ...
Working Papers , Paper 14-18

Working Paper
Collateral Runs
Vardoulakis, Alexandros; Infante, Sebastian (2018-04-04)
This paper models an unexplored source of liquidity risk faced by large broker-dealers: collateral runs. By setting different contracting terms on repurchase agreements with cash borrowers and lenders, dealers can source funds for their own activities. Cash borrowers internalize the risk of losing their collateral in case their dealer defaults, prompting them to withdraw it. This incentive creates strategic complementarities for counterparties to withdraw their collateral, reducing a dealer's liquidity position and compromising her solvency. Collateral runs are markedly different than ...
Finance and Economics Discussion Series , Paper 2018-022

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