Emilia Garcia-Appendini

Supplier Certification and Trade Credit

We find evidence that input suppliers provide credit quality certification to their borrowers. Banks are more likely to lend to firms that have been granted trade credit by their suppliers and to firms that pay higher proportions of their trade credit debts on time. This ‘certification’ role of trade credit is most apparent when banks are relatively uninformed about their potential creditors, and when firms are relatively more opaque. We address causality using instruments that are motivated by theories and empirical regularities of the corporate use of trade credit. Results are robust to potentially endogenous relationships between the use of trade and bank credit.

Trade Credit Use as Firms Approach Default

Using a sample of firms matched with their suppliers, we study the use of trade credit as firms approach a default event. We show that, in the extensive margin, around one third of suppliers exit the relationship well ahead of default, but the rest continue the relationship. Relationships are more likely to continue when suppliers sell differentiated goods, are located close to their distressed clients, sell large proportions to the distressed clients, or when the distressed client is in a concentrated market, suggesting that dependent suppliers are held up in distressed relationships. Firms with suppliers that continue the relationship continue purchasing the same amounts from their suppliers and have larger increases in accounts payable, suggesting that held-up suppliers trade-off the potential benefits of granting concessions to their clients during bad times with the risk of increasing their exposure to a distressed firm.

Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-Experiment

I analyze whether the higher financing costs following the idiosyncratic bankruptcy or default of one firm affect the real investment decisions of non-distressed competitors. Results show that firms which are more affected by the higher financing costs (“treated firms”) reduce investment by around 10% more than their less vulnerable peers. These results are not driven by industry downturns that coincide with the bankruptcies or defaults, nor are they caused by higher refinancing risk or forward-looking managers of treated firms. Results suggest that idiosyncratic shocks can be transmitted to peers through an asymmetric information channel, but not through a collateral channel.In this paper I analyze whether the higher financing costs following the distress or bankruptcy of one firm affect the real investment decisions of non-distressed industry competitors. To achieve identification of the causal effect of contagion on investment, I use a difference-in-differences approach that compares within-firm changes in investment around the industry distress for non-distressed competitors with large proportions of their debt maturing immediately after the industry distress, relative to other non-distressed competitors in the same industry but that did not have debt maturing immediately after the industry distress. Results suggest that the former firms, which are more affected by the higher costs of financing due to contagion, reduce their capital expenditures to capital ratio by around 10% more than the less-sensitive firms. Further results show that contagion effects are milder in concentrated and low-leveraged industries, as well as in industries that do not rely too heavily on external financing.

Cultural Preferences and Firm Financing Choices

We document significant differences in the financing structures of small firms with managers of diverse cultural backgrounds. To isolate the effect of culture, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest significant cultural differences in the preference toward debt funding and in the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industries, trading partners, and headquarters locations.

Cultural Preferences and the Choice between Formal and Informal Financing

This paper documents significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To separate the effect of culture from other factors that affect the financing structure of firms, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant differences in the culturally embedded preferences towards the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industrial sectors, trading partners, and headquarters location.

Experience and Brokerage in Asset Markets: Evidence from Art Auctions

Focusing on the art market, where auction houses act as brokers between art sellers and buyers, we investigate whether more experienced brokers achieve better performance as information providers. We use a unique data set of auctions of Italian paintings in various houses around the world, and we measure experience as the number of times an auctioneer has auctioned the artworks of a certain artist in a given location. We find that more experienced auction houses (i) are more likely to sell and (ii) provide more precise pre-sale estimates. These findings suggest that experience plays an important role for brokers to reduce illiquidity and opacity in markets with asymmetric information.

Do Derivatives Enhance or Deter Mutual Fund Risk-Return Profiles? Evidence from Italy

We analyze the use of derivatives in Italian equity mutual funds from December 2002 to May 2007. We find that the average asset allocation in derivatives increased by around 50% during this time frame, roughly coinciding with the harmonization of Italian regulation of mutual funds to European standards. During the same period, users of derivatives significantly increased their risk-adjusted performance, increased their market risk exposures, reduced idiosyncratic and total risk, reduced skewness, and increased kurtosis. In contrast, non-users of derivatives increased their overall performance without either increasing their market exposures or changing the skewness of their returns. In spite of the increased exposure to derivatives, overall risk reduction was equal for both users and non-users of derivatives. These findings do not support the public perception about the use of derivatives as a means to increase risk through speculation.