Raising Household Leverage: Evidence from Co-Financed Mortgages

This article studies the impact on mortgage origination conditions and performance of a product that aims at raising household leverage: bank mortgages co-financed with a housing provident fund (HPF), a compulsory saving scheme for all private sector workers in Mexico. Relative to traditional bank mortgages, our estimates show that down payment of the co-financed declines substantially, by 7.6 percentage points, whereas purchased properties are not more expensive. Despite their higher leverage, co-financed bank mortgages do not exhibit higher default rates---their lower liquidity needs to cover upfront costs and monthly payments reduce credit risk. We also find distributional effects: The scheme alleviates borrowing constraints more at lower incomes, especially when banks are smaller. Larger banks, with a greater share of low-income borrowers, use co-financing to reduce the amount lent to those segments. Thus, when the HPF's lending conditions become relatively less generous at lower incomes, we find that larger banks neutralize the substitution between traditional and co-financed mortgages that is found on smaller banks' portfolios

Trading away incentives

Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are largely neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers' portfolio choices

Housing Yields

This paper investigates heterogeneity in residential property yields using rental and sale listings from a major German online real estate platform between 2007 and 2017. Equipped with property-level rent-to-price ratios obtained by matching properties for sale and for rent, we show that these yields strongly co-move with regional factors, such as population age structure, industry structure, housing supply rigidities, and the liquidity and size of the housing market. Differences are particularly pronounced between globally relevant cities and other areas. Despite the importance of regional factors, the degree of unexplained heterogeneity in yields is puzzlingly high relative to equity yields, whose variation can be largely understood through a few systematic factors. Specifically, a substantial fraction of housing yields heterogeneity is explained neither by local factors nor by an extensive array of property-specific observable features, possibly pointing to the crucial role of idiosyncratic factors, within-city aggregation effects, as well as of informational and regulatory frictions

Reverse Revolving Doors in the Supervision of European Banks

We show that the presence of executive directors with prior experience in the finance industry is pervasive on the boards of European national banking supervisors. Up to one executive out of three has previously held positions in the industry he/she supervises. Appointments of such executives impacts more favorably bank valuations than those of executives without a finance background. The proximity to supervised banks---rather than superior financial expertise or intrinsic skills---appears to drive the positive differential effect of finance-related executives

The Real Effects of Universal Banking: Does Access to the Public Debt Market Matter?

I analyze the impact of the formation of universal banks on corporate investment by looking at the gradual dismantling of the Glass-Steagall Act's separation between commercial and investment banking. Using a sample of US firms and their relationship banks, I show that firms curtail debt issuance and investment after positive shocks to the underwriting capacity of their main bank. This result is driven by unrated firms and is strongest immediately after a shock. These findings suggest that universal banks may pay more attention to large firms providing more underwriting opportunities while exacerbating nancial constraints of opaque firms, in line with a shift to a banking model based on transactional lending

Essays in Empirical Corporate Finance

This dissertation consists of three chapters. The first chapter examines whether the availability of credit default swaps (CDS) has consequences for creditor governance. CDSs offer creditors the opportunity to hedge credit risk and may impact their willingness to renegotiate debt agreements after covenant violations and to monitor firms. I show that firms implement more conservative investment and financing policies after covenant violations if CDSs are traded on their debt, consistent with heightened renegotiation frictions. Moreover, firms with traded CDS contracts exhibit significantly worse operating and stock performance after covenant violations. Overall, these findings point to an exacerbation of debt-equity conflicts due to the availability of CDSs. Finally, I analyze the interaction of creditor governance and internal governance, and provide evidence suggesting that the possibility to hedge risk through CDSs also reduces creditors' incentives to monitor firms. The second chapter models the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial pay-for-performance sensitivity. I show that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. I also show that this reduction should be larger in highly procyclical firms. Using a sample of U.S. public firms, I provide evidence supportive of the model's prediction. First, I find that equity-based incentives are reduced during recessions. Second, I show that the magnitude of this effect is increasing in a firm's cash flow cyclicality. The third chapter analyzes the impact of the formation of universal banks on corporate investment by looking at the gradual dismantling of the Glass-Steagall Act's separation between commercial and investment banking. Using a matched sample of U.S. firms and their relationship banks, I show that firms curtail investment after positive shocks to the underwriting capacity of their main bank. This result is driven by unrated firms and is strongest in the first two years after a shock. Moreover, I obtain similar results for borrowing firms' net debt issuance activity. As an exogenous shock to the formation of universal banks in the U.S., I also use the 1997 loosening of restrictions on commercial banks' securities activities. My findings suggest that universal banks may pay more attention to large and transparent firms that provide more underwriting opportunities while exacerbating financial constraints of opaque firms

Internal Governance and Creditor Governance: Evidence from Credit Default Swaps

I study the relation between internal governance and creditor governance. A deterioration in creditor governance may increase the agency costs of debt and managerial opportunism at the expense of shareholders. I exploit the introduction of credit default swaps (CDS) as a negative shock to creditor governance. I provide evidence consistent with shareholders pushing for a substitution effect between internal governance and creditor governance. Following CDS introduction, CDS firms reduce managerial risk-taking incentives relative to other firms. At the same time, after the start of CDS trading, CDS firms increase managerial wealth-performance sensitivity, board independence, and CEO turnover performance-sensitivity relative to other firms

A Service of zbw Internal Governance and Creditor Governance: Evidence from Credit Default Swaps Second Draft

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Do Courts Matter for Firm Value? Evidence from the US Court System

We estimate how US state courts impact firm value by exploiting a US Supreme Court ruling that exogenously changed firms’ exposure to different courts. We find that increased exposure to more business-friendly courts is associated with positive announcement returns. We find no such association for objective court quality. Consistent with the ruling impacting firm value through the legal environment channel, we find that effects are stronger for firms with high litigation exposure. We find that the ruling led to a shift in both the geographic distribution of lawsuits and operations of firms