Mats Levander
ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE
Mats Levander ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE
ISBN 978-91-7731-095-2
DOCTORAL DISSERTATION IN FINANCE
STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018
Mats Levander
ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE
Mats Levander ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE
ISBN 978-91-7731-095-2
DOCTORAL DISSERTATION IN FINANCE
STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018
Essays on Household and Corporate Finance
Mats Levander
Akademisk avhandling
som för avläggande av ekonomie doktorsexamen vid Handelshögskolan i Stockholm
framläggs för offentlig granskning torsdagen den 4 oktober 2018, kl 15.15,
Swedish House of Finance, Drottninggatan 98, Stockholm
ESSAYS ON HOUSEHOLD AND CORPORATE
FINANCE
Essays on Household and Corporate Finance
Mats Levander
Dissertation for the Degree of Doctor of Philosophy, Ph.D., in Finance
Stockholm School of Economics, 2018
Essays on Household and Corporate Finance SSE and Mats Levander, 2018c
Front cover illustration:
Sergii Mogyla/Shutterstock.com, 2018c ISBN 978-91-7731-095-2 (printed)
ISBN 978-91-7731-096-9 (pdf)
This book was typeset by the author using LATEX.
Printed by:
BrandFactory, G¨oteborg, 2018 Keywords:
Household finance, financial buffer, mass layoff, unemployment, corporate finance, financial crisis, firm investment, business group, internal capital markets, external financing constraints, financial distress.
iii
To my father
Foreword
This volume is the result of a research project carried out at the Department of Finance at the Stockholm School of Economics (SSE).
This volume is submitted as a doctoral thesis at SSE. In keeping with the policies of SSE, the author has been entirely free to conduct and present his research in the manner of his choosing as an expression of his own ideas.
SSE is grateful for the financial support provided by VINNOVA and the Jan Wallander och Tom Hedelius stiftelse which has made it possible to carry out the project.
G¨oran Lindqvist Magnus Dahlquist
Director of Research Peter Wallenberg Professor of Finance Stockholm School of Economics Head of Department of Finance
Stockholm School of Economics
Acknowledgements
First, I am eternally grateful to my supervisor Mariassunta Giannetti for her patience and support and invaluable advice. I could always rely on her economic intuition and experience. I would also like to extend my gratitude to other faculty members of the Department of Finance who contributed substantially during this thesis, in particular I would like to thank Mike Burkhart, Cristina Cella, Dong Yan, Laurent Bach, Ramin Baghai and Paolo Sodini. I am also appreciative to the administrative staff of the department, in particular Anneli Sandbladh and Jenny Wahlberg Andersson who always provided excellent help.
Second, I am also very grateful to everyone involved in making my research visit to Indiana University, Kelley School of Business, unforget- table. I thank my sponsor Andrew Ellul for providing helpful comments and suggestions for my research projects and also helping me settling in in Bloomington. I am also indebted to Greg Udell, Matt Billett, Kristoph Kleiner, Isaac Hacamo and Burcu Esmer. I thank the Jan Wallander och Tom Hedelius stiftelse for making my visit possible.
Third, I thank my current co-authors and friends, Marieke Bos and Erik von Schedvin, without whom this thesis would never have been written.
Fourth, I would like to thank my colleagues at the Research Division at Sveriges riksbank. In particular my office mate and friend Matias Quiroz.
We shared the joys and the frustrations during our studies through our identical sense of humor. I would like to thank Kasper Roszbach, who, apart from discussing and commenting on my projects, encouraged me to apply for a VINNOVA grant to pursue a Ph.D.. I also thank Tor Jacobson and Jesper Lind´e who made arrangements so that I could be a part of the Research division at Sveriges riksbank during my studies. I am also in- debted to Thomas Jansson, Karl Walentin, Tor Jacobson, Mikael Carlsson and Peter van Santen for always finding the time to answer my countless
viii ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE questions.
Fifth, I would like to thank my fellow PhD students. In particular, I thank Valeri Sokolovski, Tommy von Br¨omsen, Henrik Petri, Jieying Li, Fatemeh Hosseini, Mariana Khapko, Tomas Th¨ornqvist, Viktor Thell and Yingjie Qi.
Sixth, I would like to thank my family. My father Anders, who tragi- cally passed away during the course of this thesis, my mother, Elisabeth, and my brother Erik. I also thank my daughters Julia and Matilda for always making me smile and laugh. Last, but not least, I would like to thank my fantastic partner, Johanna, for her understanding, support and love during the course of this thesis.
Stockholm, August 24, 2018 Mats Levander
Introduction
This doctoral thesis consists of three independent papers in empirical house- hold and corporate finance. Each chapter is self-contained and may be read independently.
In the first paper, Financial Buffers, Unemployment Duration and Re- placement Income, I empirically examine how the financial buffer of un- employed individuals affects the duration of their unemployment spell and their replacement labor income after they have found a new position, re- spectively. The analysis is conducted on a very detailed Swedish dataset, which provides a complete picture of households balance sheets. As unem- ployment spells may not be exogenous events (e.g., a worker can anticipate unemployment, plan to become unemployed, or be fired for unobserved reasons), I focus on individuals who are affected by mass layoffs. Such events are generally considered to be exogenous with respect to individual characteristics. Nevertheless, a household’s balance-sheet position at the time of the layoff event may not be exogenous. To alleviate endogeneity issues, I measure the households’ financial buffer in the years prior to the layoff event year.
I find that both liquid financial wealth and net wealth have a positive effect on both unemployment duration and replacement income, consistent with that individuals with larger financial buffers are able to search more thoroughly for a new position and find a better match for their human capital compared to individuals with smaller or no financial buffer. Given the positive effects due to both financial wealth and net wealth, I split net wealth into financial wealth and home equity to disentangle their separate impacts. The results suggest that financial wealth is the key driver of the baseline results, which is plausible given that financial wealth is the more readily available one of the two buffers. I also find interesting cross-sectional effects e.g., the impact of the financial buffer differs across educational lev-
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els. Having a financial buffer has a statistically significant positive effect on both duration and replacement labor income for low-educated work- ers (education below university level), while I find no significant effect for high-educated workers (university education and above). Finally, I doc- ument that households characterized by individuals with unemployment durations greater than zero decrease their financial wealth buffers during their unemployment spells.
In the second paper, Diversification Advantages During the Global Fi- nancial Crisis, I investigate whether being part of a business group miti- gated the impact of the global financial crisis on the investments of limited liability firms in Sweden. The global financial crisis is used as an exoge- nous shock to firms’ abilities to raise external financing. I find that busi- ness group affiliation had a mitigating effect on the impact of the crisis on firm investments. Standalone firms reduced their investments by 33% on average, while business group firms reduced their investments by 14% on average. The difference is substantial and highlights the benefits of business group affiliation for small and medium-sized, private and bank dependent firms who constitute the lion share of firms in Sweden. These findings are driven by diversification effects among business group firms due to busi- ness group firms’ easier access to external financing and use of internal capital markets. The internal capital markets effects are only present for diversified business groups that operate in multiple industries, consistent with a diversification effect. Finally, I also document that business group firms’ profitability increased relative to standalone firms after the crisis, suggesting that they used their advantage to invest efficiently.
The third paper, Relative Income, Indebtedness and Defaults, is co- authored with Marieke Bos and Erik von Schedvin. Using Swedish panel data on individual borrowing characteristics and neighborhood incomes, we assess the impact of shifts in relative income on indebtedness and payment delinquencies. We find that a worsening in relative income vis-`a-vis simi- larly aged neighbors leads to higher indebtedness, primarily due to shifts in consumption debt. This relationship is not accompanied by a rise in loan delinquencies. However, we document over-indebtedness and finan- cial distress for certain demographic sub-groups that are presumably more responsive towards peer influence (e.g., younger individuals).
We also explore a sequence of tax reforms that led to plausibly exoge-
xi nous increases in disposable income for neighborhood peers in the upper part of the income distribution. Among the group that did not enjoy the tax cuts, we find relative larger adjustments in indebtedness for individuals living in neighborhoods where a larger share of their peers enjoyed tax cuts.
The effect is primarily observed for individuals with incomes just below the incomes of those who received the tax cuts, while we find no effects for indi- viduals with lower incomes. This result is consistent with the presumption that individuals are more responsive to consumption changes displayed by neighbors with similar consumption patterns. When exploring the under- lying source of the adjustment, we find that the effect is the outcome of adjustments in consumption debt.
The remainder of this dissertation consists of the three papers intro- duced above.
Contents
1 Financial Buffers, Unemployment Duration and Replace-
ment Labor Income 1
1.1 Introduction . . . 2
1.2 Financial Buffers and Job Searches . . . 7
1.3 Data and Institutional Setting . . . 8
1.3.1 Unemployment Benefits . . . 9
1.3.2 Mass layoff . . . 9
1.3.3 Unemployment duration . . . 10
1.4 Sample . . . 10
1.5 Methodology . . . 11
1.6 Empirical Results . . . 13
1.6.1 Unemployment Duration . . . 13
1.6.2 Replacement Labor Income . . . 15
1.6.3 Financial Wealth and Home Equity . . . 18
1.6.4 Heterogeneity . . . 19
1.6.5 Reverse Causality . . . 22
1.6.6 Use of Financial Buffers . . . 23
1.7 Conclusion . . . 24
1.8 Bibliography . . . 25
1.9 Figures . . . 28
1.10 Tables . . . 29
1.11 Appendix . . . 44
2 Diversification Advantages During the Global Financial Cri- sis 47 2.1 Introduction . . . 48
2.2 The Global Financial Crisis in Sweden . . . 54
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xiv ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE
2.3 Diversification Advantages . . . 55
2.4 Data . . . 56
2.4.1 Databases . . . 56
2.4.2 Definitions . . . 57
2.4.3 Sample Construction . . . 57
2.5 Empirical Strategy . . . 58
2.5.1 Firms’ Investments . . . 58
2.5.2 Test of Access to External Financing . . . 59
2.5.3 Test of Internal Capital Markets . . . 59
2.6 Empirical Results . . . 61
2.6.1 Summary Statistics . . . 61
2.6.2 Test of Difference in Means . . . 61
2.6.3 Firms’ Investments . . . 62
2.6.4 The Ability of Group Firms to Raise External Capital 67 2.6.5 Internal Capital Markets . . . 67
2.6.6 Efficient Allocation of Capital . . . 71
2.7 Conclusion . . . 72
2.8 Bibliography . . . 74
2.9 Figures . . . 78
2.10 Tables . . . 81
3 Relative Income, Indebtedness and Defaults: An Empirical Characterization 95 3.1 Introduction . . . 96
3.2 Measuring Consumption Externalities . . . 100
3.2.1 Data . . . 100
3.2.2 Descriptive statistics . . . 101
3.2.3 Empirical Strategy . . . 102
3.3 Empirical Results . . . 107
3.3.1 The association between indebtedness and the in- come of neighborhood peers . . . 107
3.3.2 Difference-in-differences results . . . 112
3.4 Conclusion . . . 115
3.5 Bibliography . . . 117
3.6 Figures . . . 120
3.7 Tables . . . 125
