Job Market Paper
This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for the provision of credit. I find that bank-dependent firms borrow from well capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching improves access to credit during a crisis by pairing bank-dependent firms with stable banks. Small firms pay a premium to borrow from high capital banks, consistent with these banks offering the benefit of stability. During the financial crisis, bank-dependent borrowers faced significantly greater loan supply from their relationship banks than they would have without this matching.
I use municipal bond transaction data to estimate credit spreads for state and local governments. I adjust for the tax exemption and decompose the yield spread into liquidity and default components. Default risk contributes more than liquidity to time series variation in yield spreads. There is wide dispersion in default spreads among state and local governments. Detroit is an outlier among large cities. The time series distribution of default spreads from 1998 to 2012 does not indicate an upward trend in municipal bond default risk. Default spreads approximate CDS spreads for states with traded CDS, confirming the decomposition and providing a method to estimate credit spreads of issuers without traded CDS.
Systematic risk is an important determinant of corporate capital structure. A one standard deviation increase in asset beta corresponds to a decrease in leverage of 13%, controlling for total asset volatility. This evidence is consistent with recent dynamic capital structure models that relate financing decisions to macroeconomic factors and provides further impetus for exploring the impact of systematic risk on corporate decisions.