Three Essays in Corporate Finance

Abstract

My dissertation focuses on how the way firms are funded, particularly in periods of financial distress, affects their employment and investment choices. It consists of three papers. The first paper studies how bank lending patterns change after a shock leads some firms to become non-viable. Banks will often continue to lend to poorly performing firms, but it is difficult to distinguish cases where they are lending to viable firms suffering a temporary setback or whether they are ”evergreening”, lending to nonviable firms to help them avoid or delay default. We use a shock to firm growth from the implementation of tolls in a previously free-to-use highway system to attempt to disentangle the two groups of firms. We find evidence more consistent with evergreening: once firms have received a loan in distressed circumstances, they are far more likely to receive a subsequent loan while remaining in a distressed situation. The second paper studies the composition of bank lending in Portugal during the sovereign debt crisis. We provide evidence that banks distort the composition of credit supply in order to comply with ratio-based capital requirements in times of economic distress. An unexpected intervention by the European Banking Authority provides a natural experiment to study how banks respond to falling below minimum required capital ratios during an economic downturn. We show that affected banks respond by cutting lending but also by reallocating credit to distressed firms with underreported loan losses. We develop a method to detect underreported losses using loan-level data. The credit reallocation leads to a reallocation of inputs across firms. We calculate that the resulting increase in input misallocation accounts for about 13\% of the decline in productivity in Portugal in 2012. The third paper uses US Census data to study the impact of private equity deals on employment. Private equity transactions are associated with employment reallocation and job losses (Davis et al. 2014, Olsson and Tag 2017, Arnold et al 2023). However, there is divergence around the role PE firms play in worker outcomes. In this paper we test three hypothesis for why workers are laid off after private equity buyouts: use of market power, breach of trust, and efficient reallocation.