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Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of concentrated lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm’s debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Uncertainty, Stock Prices and Debt Structure: Evidence from the U.S.-China Trade War
Using the recent U.S.-China trade war as a laboratory, we show that policy uncertainty shocks have a significant impact on stock prices. This impact is less negative for firms that heavily rely on bank debt whereas non-bank debt does not have a mitigating effect. Moreover, the mitigating effect of bank debt is concentrated among zombie firms. A zombie firm that derives half of its capital from bank debt has no negative stock price reaction to increased uncertainty. These results are consistent with bank debt providing insurance for zombie firms in bad economic times.
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening ...
Working Paper
Zombie Lending to U.S. Firms
We show that U.S. banks do not engage in zombie lending to firms of deteriorating profitability, irrespective of capital levels and exposure to such firms. In contrast, unregulated financial intermediaries do, originating more and cheaper loans to these firms. We establish these results using supervisory data on firm-bank relationships, syndicated lending data for banks and nonbanks, and an empirical setting with quasi-random shocks to firm profitability. Although credit migrates from banks to nonbanks, zombie firms file for bankruptcy at an elevated rate, suggesting that nonbanks’ zombie ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to firms that are close to default. We detect such lending behavior using loan-level supervisory data for the United States. Banks that own a larger share of a firm's debt provide distressed firms with relatively more credit at lower interest rates. Building on this empirical validation, we incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening affects aggregate outcomes, resulting in lower interest rates, higher ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening ...
Working Paper
Lending to unhealthy firms in Japan during the lost decade: distinguishing between technical and financial health
We investigate the misallocation of credit in Japan associated with banks? evergreening loans, distinguishing between two types of firm distress: (perhaps temporary) financial distress and technical distress, which reflects weak operational capabilities, as indicated by low total factor productivity. We show that previous evidence related to firms? financial health is problematic due to the mixing of loan-demand and loan-supply effects. Using a direct measure of operational health, we provide unambiguous, direct evidence of evergreening behavior, as well as confirming evidence based on the ...
Working Paper
Evergreening
We develop a simple model of relationship lending where lenders have incentives for evergreening loans by offering better terms to less productive and more indebted firms. We detect such lending behavior using loan-level supervisory data for the United States. Low-capitalized banks systematically distort firms’ risk assessments to window-dress their balance sheets. To avoid further reductions in their capital ratios, such banks extend relatively more credit to underreported borrowers. We incorporate the theoretical mechanism into a dynamic heterogeneous-firm model to show that evergreening ...