Aksel Mjøs

On the Pricing of Performance Sensitive Debt

Performance sensitive debt (PSD) contracts link a loans interest rate to a measure of the borrowers credit relevant performance, e.g., if the borrower becomes less credit worthy, the interest rate increases according to a predetermined schedule. We derive and empirically test a pricing model for PSD contracts and find that interest increasing contracts are priced reflecting a substantial risk of shocks to borrower credit quality. Borrowers using such contracts are of an overall higher credit quality compared to borrowers using interest decreasing contracts. These contracts are priced as if no risk of shocks to borrower credit quality is present.

The Causal Impact of Distance on Bank Lending

We exploit exogenous shocks to the distance between corporate borrowers and banks to analyze the role of distance in commercial bank lending. We find that a reduction in travel time due to improved infrastructure increases the likelihood of initiating a new borrowing relationship, evidence that lower distance creates a surplus from lower transaction costs. In existing lending relationships, however, banks capture a fraction of this surplus by increasing interest rates. Larger changes in distance are associated with stronger effects and banks with higher market power capture a larger fraction of the surplus.

Credit Supply Shocks, Financial Constraints and Investments for Small and Medium-sized Firms

In this paper, we find that reduced credit supply reduces firm investments in our sample of small private firms. The effect is strongest for the least financially constrained firms. We use a representative survey of identified Norwegian firms that is linked with financial, bank account and ownership data, and take advantage of the financial crisis in 2008–9 as a natural experiment. We examine several potential explanations for our findings, asking: (i) did the financially constrained firms hedge against potential future credit supply shocks? (ii) did they have better access to shareholder funding? or (iii) was the effect driven by past investment patterns? We find that access to shareholder funding during the crisis offset the differences in the effects of reduced credit supply on investments across conventional financial constraint categories. The findings suggest that only examining the correlation between credit supply and investments for the ex ante most financially constrained firms during economic downturns is unlikely to capture the full dynamics of the credit channel on the business cycle.

Making Bank: Why High Bank Leverage is Optimal – For the Bank's Shareholders

We create a structural credit model to calculate the optimal capital structure for a bank that provides asset backed loans, such as corporate loans and mortgages. The banks assets are loans, which means that the banks exposure to risk is mitigated by the borrowers equity. We capture the effect of this mitigation by including the borrowers leverage, in addition to its asset volatility, as the sources of risk for the bank. Our results contribute a quantitative explanation for the high levels of bank leverage observed in practice. When unconstrained by regulation, the banks shareholders find it optimal, for reasonable values of borrower risk parameters, to select a bank leverage close to 100%.

Start-Up Financing: Outside Equity

We investigate the extent to which start-ups use outside equity, and interpret our results in relation to financial contracting theory. We do so by studying the start-up and founder characteristics that are associated with the use of outside equity financing, using a unique dataset from Norway. Our findings suggest that adverse selection are less of a concern for start-ups than ex-post opportunistic behavior (risk shifting) by the entrepreneur as in Myers (1977) and Ravid & Spiegler (1997). One implication of this finding is that outside equity and debt are complements rather than substitutes, and that an extra unit of equity financing has a multiplicative effect on total financing through releasing additional debt financing. We do not find convincing evidence that the use of outside equity has detrimental effects on entrepreneurial effort, nor that a possible shortage of available outside equity leads to investor monopolization and excessive investor returns. Thus we provide evidence that outside equity provides an important avenue for entrepreneurs to escape liquidity constraints.