New: Selling Failed Banks
We study the recent episode of bank failures and provide simple facts to better understand who acquires failed banks and which forces drive the losses that the FDIC realizes from these sales. We document three distinct forces related to the allocation of failed banks to potential acquirers. First, a geographically proximate bank is significantly more likely to acquire a failed bank: only 15% of acquirers do not have branches within the same state as the failed bank. Sales are more local in regions with more soft information. Second, a failed bank is more likely to be purchased by a bank that has a similar loan portfolio and that offers similar services, highlighting the role of failed banks’ asset specificity. Third, low capitalization of potential acquirers decreases their ability to acquire a failed bank and potentially distorts failed bank allocation. The results are robust to restricting the data to actual bidders, confirming that they are not driven by auction eligibility ...
REVISION: Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?
We illustrate the welfare benefit of tax subsidies to corporate debt financing and study how the social cost/benefit trade-off of the subsidy changes with the duration of industry distress. To illustrate the benefit, we model two firms, which engage in a socially wasteful competition for survival in a declining industry. Firms differ on two dimensions: exogenous productivity and endogenously chosen amount of debt financing, resulting in a two dimensional war of attrition. Debt financing increases incentives to exit, which, while costly for the firm, is socially beneficial. These benefits decline as industry distress shortens, and the planner trades them off with increased costs of subsidizing corporate debt from the existing literature. In practice, debt payments are only subsidized for profitable firms — this implementation arises naturally in our normative model, even though the goal of the policy is to entice low productivity firms to take on debt.
REVISION: Resource Allocation within Firms and Financial Market Dislocation: Evidence from Diversified Conglomerates
When external capital markets are stressed they may not reallocate resources between firms. We show that resource allocation within firms' internal capital markets provides an important force countervailing financial market dislocation. Using data on U.S. conglomerates we empirically verify that firms shift resources between industries in response to shocks to the financial sector. We estimate a structural model of internal capital markets to separately identify and quantify the forces driving the reallocation decision and illustrate how these forces interact with external capital market stress. The frictions in internal capital markets drive a large wedge between productivity and investment: the weaker (stronger) division obtains too much (little) capital, as though it is 12 (9) percent more (less) productive than it really is. The cost of accessing external capital funds quadruples during extreme financial market dislocations, making resource allocation within firms significantly ...
REVISION: Advertising Expensive Mortgages
We use a unique dataset that combines information on advertising and mortgages originated by subprime lenders to study whether advertising helped consumers find cheaper mortgages. Lenders who advertise more within a region sell more expensive mortgages, measured as the excess rate of a mortgage after accounting for a broad set of borrower, contract, and regional characteristics. These effects are stronger for mortgages sold to less sophisticated consumers. We exploit variation in mortgage advertising induced by the entry of Craigslist across different regions as well as a battery of other tests to demonstrate that the relation between advertising and mortgage expensiveness is not spurious. Our estimates imply that consumers pay on average $7,500 more when borrowing from a lender who advertises. Analyzing advertising content reveals that initial/introductory rates are advertised frequently in a salient fashion in contrast to reset rates, which are rarely advertised. Moreover, the ...
New: Is an Automaker's Road to Bankruptcy Paved with Customers' Beliefs?
Durable goods producers can face a pernicious feedback loop between their financial health and the demand for their products. Financial distress can reduce demand for a firm’s products if it causes consumers to worry about the firm’s ability to supply flows of goods and services — such as warranties, spare parts, and maintenance — that are typically bundled with the primary durable good. This drop in demand harms the firm’s profitability, exacerbating its financial distress, which in t
REVISION: Cross-Ownership, Returns and Voting in Mergers
We show that institutional shareholders of acquiring companies on average do not lose money around public merger announcements, because they also hold substantial stakes in the targets and make up for the losses from the former with the gains from the latter. Depending on their holdings in the target, acquirer shareholders may realize different returns from the same merger, some losing money and others gaining. Using a novel dataset we show that this conflict of interests is reflected in the mut
REVISION: Strategic Proxy Voting
Despite its importance, voting in the elections of corporate boards of directors remains relatively unexplored in the empirical literature. We construct a comprehensive dataset of 3,204,890 mutual fund votes in director elections that took place between July 2003 and June 2005. We find substantial systematic heterogeneity in fund voting patterns: some mutual funds are management friendly, and others are less so. We construct and estimate a model of voting in which mutual funds impose externaliti