Firms and Banks in the Macroeconomy

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Firms and Banks in the Macroeconomy

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Firms and Banks in the Macroeconomy:

Empirical Essays using Microeconometric Methods

Niklas Amberg

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Dissertation for the Degree of Doctor of Philosophy, Ph.D., in Economics

Stockholm School of Economics, 2016

Firms and Banks in the Macroeconomy:

Empirical Essays using Microeconometric Methods

This book was typeset by the author using L^ATEX.

Front cover illustration:

Nicklas Gustafsson, 2015 Printed by:

Ineko, G¨oteborg, 2016 Keywords:

Macroeconomics, corporate finance, applied microeconometrics, economic history, financial crises, banks, credit constraints, the Great Depression, the Great Recession, productivity, reallocation, trade credit, risk management.

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For Martyna, with love

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Foreword

This volume is the result of a research project carried out at the Department of Economics at the Stockholm School of Economics(SSE).

This volume is submitted as a doctor’s 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 the Jan Wallander and Tom Hedelius Foundation which has made it possible to fulfill the project.

G¨oran Lindqvist Richard Friberg Director of Research Professor and Head of the Stockholm School of Economics Department of Economics

Stockholm School of Economics

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Acknowledgements

I have accumulated many debts during the course of writing this dissertation.

My fellow Ph.D. students in the Stockholm Doctoral Program in Economics;

the faculty and administrative staff at the Department of Economics at SSE; my coauthors; the staff of the research division at Sveriges Riksbank; the faculty, staff, and students at the Berkeley Economic History Lab; family and friends

— all have contributed, in their various ways, to improve the quality of this dissertation as well as to making it more enjoyable to write it. I am grateful to all of you for your help and support. I would also like to thank the Jan Wallander and Tom Hedelius Foundation for the financial support that made the dissertation possible.

While there are too many to thank for each to be given the recognition they deserve on just a few lines here, two persons deserve special mentioning. One is my supervisor, Richard Friberg, who has provided invaluable support and guidance over the past five years. I have particularly appreciated the great per- sonal interest that Richard takes in his students and it is indeed largely thanks to his encouragement that I will continue as a post-doctoral researcher after having completed my Ph.D. The other is Martyna, who has valiantly endured the ups and downs that inevitably comes with the writing of a dissertation and who has given love and support unfailingly when most needed.

Stockholm, July 11, 2016 Niklas Amberg

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Introduction

This dissertation is a collection of essays covering topics in corporate finance, macroeconomics, applied microeconometrics, and economic history. These essays do not, and were not intended to, fit together into a neatly unified whole, but are rather the outcomes of a number of independent research projects that I have carried out during my Ph.D. studies, in some cases on my own and in others together with coauthors. The reader should therefore not expect a book- length treatment of a single topic from this dissertation, but rather a number of self-contained essays that address topics that belong to roughly the same field of inquiry, but which apart from that are not directly related to each other.

That being said, it is possible to identify a few unifying themes that run throughout most of the dissertation and that at least partly tie the different essays together. In the broadest terms possible, this dissertation is about using firm-level data and microeconometric methods to answer questions of macroeconomic interest, and in particular questions related to the linkages between financial markets and the real economy. The style and approach of the essays are therefore mostly in the spirit of empirical corporate finance, but the questions they address are in many cases motivated by macroeconomic concerns.

This description fits some essays better than others, as will become clear, but to the extent that it is possible to briefly describe the dissertation as a whole, I believe that this is about as good as one can do.

Readers who want a very brief overview of what the different essays are about can consult the short chapter summaries below as well as the abstracts provided at the beginning of each chapter. Those who want more detail, but who are nevertheless not too keen on ploughing through long discussions of standard error clustering, matching estimation strategies, and sample selection problems, would do well to read the introductions to the chapters. The introductions are around three to five pages long overviews of the questions, methods, and results of the papers, and although they are addressed primarily

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2 FIRMS AND BANKS IN THE MACROECONOMY

to specialist readers, they are in most cases written in relatively non-technical style and should therefore be accessible to non-specialists too.

In the first chapter of the dissertation, “The Employment Effects of Bank Dis- tress: Firm-Level Evidence from a Natural Experiment,” I ask whether bank distress causes declines in employment in the real economy. The answer to this question may seem trivial, given that bank distress almost always is associated with employment declines, but banking crises usually occur at the same time as other important macroeconomic events, so it is far from obvious that they cause declines in employment. In order to tackle this identification problem, I exploit the Baltic crisis and its effects on Swedish banks as a natural experiment. This setting is uniquely well-suited to studying the employment effects of bank distress, because the crisis in the Baltic countries had a big impact on the health of a number of Swedish banks but had apart from that a very limited effect on the Swedish economy, which makes it possible to trace out the causal effect of the bank distress induced by the crisis.

In the second chapter, “Productivity and Reallocation over the Business Cycle: Firm-Level Evidence from the Great Recession in Europe,” I examine the effects of recessions on reallocation patterns. I ask whether recessions, as Joseph Schumpeter(1939) famously argued, are periods of intensified creative destruction(or “cleansing”), during which the least productive firms are driven out of the market to a greater extent than usual, or if they rather are periods of blind destruction(or “scarring”), during which firms’ survival and growth depend less on their productivity than usual, as others have argued is the case.

I examine this question in the context of Europe before and during the Great Recession and using data on hundreds of thousands of manufacturing firms from ten European countries.

In the third chapter, “Uncertainty Shocks, Banks, and the Real Economy:

Revisiting the Great Crash and the Onset of the Great Depression,” I propose a new explanation for the onset of the Great Depression in the United States.

While the Great Depression has been studied extensively over the years and for the most part is well-understood by now, the causes of its onset remains elusive. In the words of one prominent Depression scholar, “the primary mys- tery surrounding the Great Depression is why output fell so drastically in late 1929 and all of 1930”(Romer, 1988). I argue, drawing on theoretical work by

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INTRODUCTION 3 Caballero and Krishnamurthy(2008), that an important cause of the onset of the Depression was a sharp contraction in loan supply, and that this contraction itself was the result of a flight to quality on the part of banks following the Great Crash and the increase in uncertainty that it brought.

The fourth chapter, “Curbing Shocks to Corporate Liquidity: The Role of Trade Credit,” is coauthored with Tor Jacobson and Erik von Schedvin of Sveriges Riksbank and Robert Townsend of MIT. We ask whether trade credit networks — the informal networks that arise as a result of firms borrowing from and lending to each other when buying and selling intermediate inputs

— can function as liquidity insurance mechanisms. Put differently, we ask whether firms that experience temporary liquidity shortfalls can deal with this by issuing less trade credit to their customers and/or by drawing more from their suppliers. The main challenge in exploring this empirically is to estab- lish a credible causal link between liquidity shortfalls and trade credit usage.

We tackle this by exploiting the episode involving the fraud and failure of the Swedish cash-in-transit firm Panaxia as a natural experiment.

The fifth and final chapter, “Three Approaches to Risk Management – and How and Why Swedish Companies Use Them,” is coauthored with my supervisor Richard Friberg. We examine how firms use financial derivatives, operational hedging, and access to external finance for risk management purposes.

Our focus is on understanding to what extent firms use these risk management methods; how firms’ choices of risk management methods depend on their characteristics, such as size and industry; and on how the different risk management methods interact in corporate risk management programs. We examine these questions using the results of a survey of risk management practices at close to one thousand Swedish non-financial firms.

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Firms and Banks in the Macroeconomy

Firms and Banks in the Macroeconomy

Firms and Banks in the Macroeconomy:

Empirical Essays using Microeconometric Methods

Niklas Amberg

Foreword

Acknowledgements

Contents

Introduction

Bibliography