PUBLICATIONS

When Losses Turn Into Loans: The Cost of Weak Banks

with Laura Blattner and Luisa Farinha

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.

American Economic Review (June 2023)

WORKING PAPERS

Taking a Toll: Changes in Credit Access by Distressed Firms (JMP)

with Leonor Queiro

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.

Most Recent Version: March 2024

What Holds Investment Back: Evidence from 2013 Investment Tax Credit

with Laura Blattner and Luisa Farinha

We study how debt frictions and demand affect corporate investment using administrative data from a large temporary investment tax credit in Portugal. We obtain exogenous variation in demand from product destination level changes in foreign demand and proxy debt frictions by an index of three debt-earning ratios. We find that debt has a strong, non-linear effect on the likelihood that a firm invests in response to the tax credit: for firms in the worst debt-earnings quartile, demand ceases to have a significant effect on take-up. These results highlight the limit of panel regressions that only allow for a linear effect of debt on investment, do not instrument for demand and do not allow for an interaction between demand and debt.

Presented at the Portuguese Economic Journal Conference 2016, Spring Meeting of Young Economists 2016, Banque de France 2018

Most Recent Version: January 2018

WORK IN PROGRESS

The Social Impact of Private Equity

with Kyle Herkenhoff, Josh Lerner, and Gordon Phillips

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.

Post-Bankruptcy Firm Outcomes

with Edith Hotchkiss

There is considerable debate about the efficacy of Chapter 11 bankruptcy as a means of rehabilitating financially distressed but still economically viable companies. Early research on bankruptcies suggests that many companies continue to struggle financially after emerging from Chapter 11 and often restructure their debt again within a few years (Hotchkiss, 1995). A limitation of existing studies is that they only analyze firms that reemerge as publicly traded entities, since public financial information is generally only available for these firms. One might imagine that this limitation induces a favorable selection of firms, with only firms facing positive prospects able to remain public. Additionally, post-emergence, many of these firms are maintained in portfolios of distressed debt investors. These portfolios are managed according to a private equity model where the investor becomes the controlling owner when the firm leaves bankruptcy and operates the firm for some time before selling it. Including data on private firms would address this selection issue and help understand the impact of PE-like investors on portfolio companies acquired at emergence from bankruptcy.