Alexander W. Butler

Corporate Financing Decisions, Managerial Market Timing, and Real Investment

Both market timing and investment-based theories of corporate financing predict underperformance after firms raise capital, but only market timing predicts that the composition of financing (equity compared to debt) should also forecast returns. In cross-sectional tests, we find that the amount of net financing is more important than its composition in explaining future stock returns. In the time-series, investment-based factor models explain abnormal stock performance following a variety of corporate financing events that previous studies link to market timing. At the aggregate level, the amount of new financing is also more important for future market returns than its composition. Overall, our joint tests reveal that measures of real investment are correlated with future returns while measures of managerial market timing are not.

Collateral and Competition

The authors examine the effects of changes in competitive conditions on the structure of loan contracts. In particular, they present conditions in which greater loan market competition reduces the stringency of contractual collateral requirements, a prediction that is consistent with anecdotal evidence from loan markets. The authors also analyze the interaction between the degree of competition and the efficiency of contractual renegotiation. Insufficiently competitive markets may lead to bargaining difficulties that reduce the efficiency of renegotiable contracts. At low levels of competition negotiable contracts remain feasible only if collateral levels are inefficiently low.

Do Local Capital Market Conditions Affect Consumers' Borrowing Decisions?

This paper uses detailed data from an online peer-to-peer lending intermediary to test whether local access to finance affects consumers’ willingness to pay for loans. After controlling for local economic conditions and borrower credit quality, we find that borrowers who reside in areas with good access to bank finance request loans with lower interest rates. This effect is stronger for borrowers with poor credit and those seeking small loans, suggesting that local access to finance is more important for marginal borrowers. Overall, our findings shed light on how consumers substitute between alternative sources of finance.

A Note on Nonsense Predictive Regressions Arising from Structural Breaks

In this short note we respond to the argument advanced by Baker, Taliaferro, and Wurgler (2006) that our criticism of the market timing literature is simply a reinterpretation of Stambaughs (1999) small sample bias. We show analytically how structural breaks in an economic time-series may result in spurious, or nonsense, predictive regressions, whether or not there is any small-sample bias at play. We also provide a simple example showing that the magnitude of this bias could explain the predictive power of certain variables.

Credit Be Dammed: The Impact of Banking Deregulation on Economic Growth

We document substantial variation in the effect of state-level bank branching deregulation in the United States on economic growth. We examine the sources of this variation by testing multiple channels that may link deregulation and economic growth. Using a matching method that utilizes synthetic counterfactual states, we find support for the hypothesis that economic growth was associated with states where deregulation solved a capital immobility or “dammed” credit problem. We do not find support for other channels, which posit that banks became more efficient, financed more innovative businesses, or learned by observing prior deregulations.

On the Role of Inexperienced Venture Capitalists in Taking Companies Public

We use the venture capital market to examine how companies and their financial intermediaries match together, focusing on the tradeoff between the costs (due to agency problems) and benefits (due to comparative advantage in information production) of matches. Inexperienced VC firms—those with the largest potential for agency problems—tend to match with young and small companies within close proximity, presumably to enhance soft information production. This finding suggests a tradeoff between the benefits of better information production and costs of agency conflicts between company and financial intermediary. We then quantify an outcome, IPO initial return, from matching that demonstrates this tradeoff. We show empirically that, (only) after controlling for endogeneity in the choice of the intermediary, venture-backed companies that are close to their lead VC firm have substantially lower first day initial returns. Our findings thus rationalize why companies choose to finance through inexperienced venture capitalists that pose high agency costs (those with incentives to grandstand), despite the large expected costs of doing so. JEL Codes: G24, D80

Investment Bank Compensation and IPO Pricing

Using a large sample of initial public offerings (IPOs) from 1985-2002, we study how the compensation of the investment banks participating in an IPO affects the pricing of the offer. We show that shifting investment bank compensation toward the selling concession (away from management fees and/or underwriting fees) has a significant impact on the offer price of the IPO. That is, redistributing compensation toward the investment banks in the selling group increases the average price revision from the initial filing range. This result is robust to a number of controls and endogeneity concerns, and is statistically and economically significant.

Credit Where Credit is Due: Drivers of Subprime Credit

We use individual credit histories to study how creditor-friendly repossession rights in auto lending affect borrowers. Results from a quasi-experimental setting show that bankruptcy rates among subprime auto borrowers increase twice as much following natural disasters in states with strong creditors’ rights compared to states with more borrower protection. Further tests show that auto repossessions increase the likelihood of bankruptcy, and reduce borrowers’ future access to both uncollateralized and collateralized credit, including home mortgage loans. Our findings suggest that creditors’ rights can have broad, negative effects on borrowers that extend beyond merely losing a collateralized asset.

Financial Innovation and Financial Intermediation: Evidence from Credit Default Swaps

We study the influence of credit default swaps (CDS) trading on the costs of bond intermediation. After CDS initiation, CDS firms pay 12% to 28% (8 to 20 basis points) lower underwriting fees than ...

Local Economic Consequences of Stock Market Listings

We show that initial public offerings (IPOs) have nontrivial positive spillover effects on local labor markets, business environments, consumer spending, real estate, and migration. We mitigate endogeneity concerns about unobserved heterogeneity with restrictive geographic fixed effects coupled with a matching procedure. We show that it is the listing decision, which encompasses both a wealth and liquidity shock, that induces economic spillovers. Conditional on an IPO occurring, we estimate that an additional