Viktor Thell ESSAYS IN EMPIRICAL CORPORATE FINANCE
ISBN 978-91-7731-097-6
DOCTORAL DISSERTATION IN FINANCE
STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018
Viktor Thell
ESSAYS IN EMPIRICAL CORPORATE FINANCE
REAL EFFECTS OF CORPORATE DEBT
Viktor Thell ESSAYS IN EMPIRICAL CORPORATE FINANCE
ISBN 978-91-7731-097-6
DOCTORAL DISSERTATION IN FINANCE
STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018
Viktor Thell
ESSAYS IN EMPIRICAL CORPORATE FINANCE
REAL EFFECTS OF CORPORATE DEBT
Essays in Empirical Corporate Finance
Real Effects of Corporate Debt Viktor Thell
Akademisk avhandling
som för avläggande av ekonomie doktorsexamen vid Handelshögskolan i Stockholm
framläggs för offentlig granskning onsdagen den 24 oktober 2018, kl 15.15,
Swedish House of Finance, Drottninggatan 98, Stockholm
Essays in Empirical Corporate Finance
Real Effects of Corporate Debt
Essays in Empirical Corporate Finance
Real Effects of Corporate Debt
Viktor Thell
Dissertation for the Degree of Doctor of Philosophy, Ph.D., in Finance
Stockholm School of Economics, 2018
Essays in Empirical Corporate Finance: Real Effects of Corporate Debt SSE and Viktor Thell, 2018c
Front cover:
Kheng Guan Toh /Shutterstock.com, 2018c ISBN 978-91-7731-097-6(printed)
ISBN 978-91-7731-098-3(pdf)
This book was typeset by the author using LATEX.
Printed by:
BrandFactory, Gothenburg, 2018 Keywords:
Collateral laws, creditor rights, credit supply, inventory, competition, human capital, talent, labor, financial distress, trade-off theory, callable bonds, debt overhang, credit risk, mergers and acquisitions
To my parents, Anders & Monika, and my girlfriend, Rakey
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 the Jan Wallander and Tom Hedelius Foundation and the Swedish Bank Research Foundation(BFI) which has made it possible to carry out the project.
G¨oran Lindqvist Magnus Dahlquist
Director of Research Professor and Head of the Stockholm School of Economics Department of Finance
Stockholm School of Economics
Acknowledgements
The completion of this doctoral thesis was made possible due to the support of a large number of individuals.
First, I am grateful to the faculty and staff at the Stockholm School of Eco- nomics and the Swedish House of Finance for creating an ideal environment to conduct research. I will always be enormously grateful to my supervisor Bo Becker for his patience, support and invaluable advice. Throughout the pro- cess, he pushed me to be a better researcher, asking all the right questions to nudge me in the best possible direction. I am deeply indebted to the two other members of my Ph.D. committee, Per Str¨omberg and Ramin Baghai. To Per for always being willing to discuss research ideas, providing me with feedback on ongoing projects and inspiring me through his enthusiasm for research in financial economics. To Ramin for being a valuable mentor and a great co- author, for always being there to advise me on large and small obstacles I have faced.
I am also grateful to the rest of the faculty, past and current, who have hel- ped me along the way. By giving great courses, organizing reading-groups and conferences and for keeping an open-door policy and always being willing to discuss research. In particular, I thank Dong Yan, Farzad Saidi, Mike Burkart, Mariassunta Giannetti, Vincent Maurin and Laurent Bach. A special thanks to Anders Anderson, Pehr Wiss´en, Paolo Sodini, Mike Burkart, Ramin Bag- hai, Rom´eo T´edongap, and Magnus Dahlquist for their work with the Swedish House of Finance, the Ph.D. Program and the Department of Finance at Stock- holm School of Economics. Creating a high-quality data center which makes life easier for all researchers, improving the critical outreach work, improving the Ph.D. program, and generally creating a research environment attracting high-quality professors, visiting researchers and teachers. I am also grateful to those who have visited the Department of Finance and SHoF, for holding inspiring mini-courses and taking time to discuss research, especially David Ro-
viii ESSAYS IN EMPIRICAL CORPORATE FINANCE
binson and Alexander Ljungqvist. I would also like to thank all the teachers for which I have been a TA, Kathryn Kaminski, Bo Becker, Cristina Cella, Anders Anderson, and Per Str¨omberg, for setting great examples on how to approach teaching but also for providing valuable advice helping me to improve my pre- sentation and pedagogical skills. Finally, I thank the administrative staff, Anki, Anneli, Jenny, and Hedvig for doing a brilliant job and for all their help over the years.
Second, I thank my coauthors without whom this thesis would never have been written. In particular, Rui Silva, Ramin Baghai, Vikrant Vig, Bo Becker, Dong Yang, and Murillo Campello. I am especially grateful to Ramin and Rui for taking me under their wings, always being willing to discuss results and giving me opportunities to present our work.
Third, I would like to thank my fellow Ph.D. students, past and current.
In particular, I thank Patrick Augustin, Adam Farago, Nikita Koptyug and Valeri Sokolovski for their guidance and inspiration during my first years in the program. I also thank Tommy von Br¨omsen, Tolga Demir, Mats Levander, and Alberto Crosta for making the Ph.D.-student life more enjoyable.
Fourth, I am grateful for the financial support provided by the Jan Wallan- der and Tom Hedelius Foundation and the Swedish Bank Research Foundation (BFI).
Last, I would like to thank my family and friends. I thank my parents, Anders and Monika, and my sister, Hanna, for their unconditional love and support. I also thank my friends for making sure that life outside the office has been amazing: Alex, Adrian, Anna, Bj¨orn, Carl, Erik, Fabian, Johan H, Johan, Hanna, Magnus N, Magnus, Emma, Marcus, Martin, Noa, Rebecca, Staffan, Victor, and Johanna. Last, but not least, I thank my wonderful girlfriend, Rakey, for her love and support during the last years of this journey, especially for being patient and understanding the last half year when I have been juggling teaching assignments, a new job and the completion of this dissertation.
Stockholm, September 17, 2018 Viktor Thell
Contents
Introduction 1
1 Collateral laws, credit supply and product market concentration 5
1.1 Introduction . . . 6
1.2 Empirical Strategy and Data . . . 11
1.2.1 Institutional background . . . 11
1.2.2 Empirical strategy . . . 15
1.2.3 Data and Measurement . . . 16
1.3 Collateral laws and credit supply . . . 19
1.3.1 Weaker collateral rights and leverage . . . 19
1.3.2 Heterogeneous effects of law reform . . . 21
1.4 Credit supply and product market concentration . . . 22
1.5 Mechanisms and robustness tests . . . 25
1.5.1 Human capital investments . . . 25
1.5.2 Robustness tests . . . 28
1.6 Conclusion . . . 30
Bibliography . . . 30
Tables and figures . . . 35
2 Talent in Distressed firms: Investigating the Labor Costs of Finan- cial Distress 53 2.1 Introduction . . . 54
2.2 Data and variables . . . 61
2.2.1 Main data sources . . . 61
2.2.2 Sample construction . . . 62
2.2.3 Variables . . . 65
2.3 Evolution of labor force composition around bankruptcy . . 70
ix
x
2.3.1 Characteristics of workers leaving financially distres-
sed firms . . . 70
2.3.2 Voluntary vs. involuntary turnover . . . 73
2.3.3 Selection of workers joining distressed firms . . . 76
2.3.4 Placebo test . . . 78
2.3.5 Alternative test specification . . . 79
2.3.6 Financial vs. economic distress: evidence from exoge- nous currency shocks in export-intensive firms . . . . 80
2.4 Talent and capital structure . . . 82
2.4.1 Cross-sectional leverage . . . 82
2.4.2 Impact of talent mobility on leverage: evidence from a 2001 labor law reform . . . 85
2.5 Robustness and additional discussion . . . 89
2.6 Conclusion . . . 92
Bibliography . . . 93
Tables and figures . . . 99
Appendix 119 2.A Institutional background . . . 119
2.B External validity: evidence from changes in enforcement of non-compete clauses across US states . . . 122
2.C Robustness and additional tests . . . 132
Appendix bibliography . . . 136
Appendix tables and figures . . . 139
3 Issuer credit quality, callable bonds and debt overhang 173 3.1 Introduction . . . 174
3.2 A model of debt overhang, takeovers and callable debt . . . . 178
3.2.1 Straight debt . . . 178
3.2.2 Callable debt . . . 180
3.3 Data . . . 182
3.4 Empirical results . . . 183
3.4.1 Prevalence, cost, and issuance of callable bonds . . . . 184
3.4.2 Secondary market prices . . . 185
3.4.3 The decision to call . . . 186
3.5 The impact of callability on takeover activities . . . 187
xi
3.5.1 Takeover incidence: hazard models . . . 188
3.5.2 Takeover incidence: matched samples . . . 189
3.5.3 Bondholder announcement effects . . . 190
3.6 Robustness . . . 191
3.6.1 Callable loans . . . 191
3.6.2 Convertible bonds . . . 192
3.6.3 Alternative industry definitions . . . 192
3.7 Conclusion . . . 192
Bibliography . . . 194
Tables and figures . . . 197
Introduction
This doctoral thesis consists of three independent empirical papers in finan- cial economics. A unifying theme across all three papers is that they study real effects of corporate debt financing. Each paper investigates different real outcomes and various dimensions of debt financing.
The first paper has its background in how different types of institutional frameworks and specifically how the strength of creditor rights is one of the main determinants of the functioning of the credit market. It focuses on the institutional environment and the laws which govern the payoff profile for cre- ditors when firms default. It studies how those laws impact different types of firms’ ability to borrow and ultimately how that affect the level of competition in different sectors.
The second paper has its foundation in the trade-off theory of capital struc- ture, which suggest that firms weigh the advantages and disadvantages of debt when choosing their optimal capital structure. One potential, indirect, cost of high levels of debt financing is the inability of firms in financial distress to retain and attract skilled and important workers. The second paper test this hypothesis empirically.
The third paper moves beyond large-scale institutional frameworks and optimal levels of debt and into contractual features of debt. It analyzes how one agency cost of debt, debt overhang, can be mitigated through call options in corporate bonds. Under-investment through debt overhang is a situation when firms forego positive NPV investments as creditors capture enough of the upside to make it an unattractive investment for managers acting in the interest of shareholders. The third paper studies how fixed price callability, which caps the upside for bondholders, impacts investments.
The list of papers comprising this thesis is as follows.
1
2
Collateral laws, credit supply and product market concentration
This paper studies the real effects of collateral laws. We show how a change in collateral laws leads to increased concentration through a shift in the debt allocation where smaller firms are unable to borrow and invest. To identify this channel, we exploit a collateral law reform in Sweden, which changed the liquidation value of the collateral typeFloating liens. First, the supply of credit in affected industries decrease, with the smallest firms most adversely affected.
As a result, product market concentration in industries that were more affected by the law reform increased. We investigate potential mechanisms and find that the inability of small firms to borrow was primarily associated with reduced investments in human capital.
Talent in Distressed Firms: Investigating the Labor Costs of Financial Distress
(joint with Ramin Baghai, Rui Silva and Vikrant Vig)
The importance of skilled labor and the inalienability of human capital may expose firms to the risk of losing talent in critical times. Using Swedish employer-employee matched data, we document that firms lose their most skil- led workers as they become financially distressed. In a quasi-experiment invol- ving export-intensive firms with different capital structures, we confirm that financial distress is driving these results. Following a negative export shock caused by exogenous currency movements, talented workers abandon the firm, but only if the exporter is highly leveraged. Finally, we observe that firms that rely more on their top talent have more conservative capital structures, con- sistent with the interpretation that talent dependence is associated with higher labor costs of financial distress.
Issuer credit quality, callable bonds and debt overhang (joint with Bo Becker, Murillo Campello and Dong Yan)
A large number of US corporate bonds are callable at a fixed price. We test the theory that callability serves to limit debt overhang by limiting the value upside of debt. Several key predictions of this theory fit the data. First, many firms, especially high yield, issue callable bonds. Second, bonds are called when issuers experience improvements in credit quality (when bonds would other- wise have risen in value). Third, announcement returns show that holders of
3 acquisition targets’ callable bonds benefit little from takeovers, unlike holders of non-callable bonds. Last, firms with callable debt are a third more likely to be takeover targets.
