This paper documents debt misreporting in unaudited financial statements and examines its sources and implications for bank lending. Using a unique combination of datasets, we measure debt misreporting as the difference between firms’ bank debt reported on the balance sheet and the corresponding information recorded in the public credit registry. We find that debt misreporting is not randomly distributed and that firms with greater financing needs are more likely to underreport, rather than overreport, their debt. We further show that underreporting is more prevalent when firms approach new lenders, consistent with firms using it in an attempt to obtain credit. In terms of credit supply, these firms receive less credit, particularly from banks with greater prior exposure to misreporting and from banks that verify borrower information through the credit registry. In addition, underreporting firms exhibit subsequent signs of financial weakness, including delays in supplier payments and a higher probability of non-performing loans, charge-offs, and insolvency. Overall, our findings suggest that a substantial part of debt underreporting is strategic and that banks take it into account when making credit decisions.
We study tradeoffs that lenders face when borrowers breach covenants and quantify the implications for the lender's revealed preference for continuing lending relationships. When a borrower breaches a pre-set covenant threshold, the lender faces a choice between enforcement-which generates fees and behavioral concessions that reduce default risk-and forbearance, which preserves the relationship but forgoes these benefits. Using a fuzzy regression discontinuity design and simple tradeoff model, we estimate that the lender's revealed preference for continuing the marginal lending relationship at the enforcement threshold is 11.6% of loan amount and find heterogeneity in this estimate that is consistent with theories of information-based relationship value.
We empirically study how banks’ conversions from mutual to stock ownership affect depositor welfare. Using U.S. data and a discrete choice model of deposit account demand, we show that when a bank is mutual, depositors are less sensitive to price, and each unit of cash and liquidity services is valued more positively. We then examine how mutual-to-stock conversions affect deposit account characteristics and combine these changes with our demand estimates to assess conversions’ impact on depositor welfare. Our estimates indicate that conversions increase depositor welfare, challenging the premise that mutual banks operate for the benefit of their members.
We study the relative importance of institutional investors and managers for corporate ESG policies. We find that investor effects are the strongest predictors of ESG performance. This result holds across individual ESG dimensions, and it is particularly pronounced for the environmental dimension. Long-term investors and those headquartered in Democratic-leaning states are most strongly associated with higher ESG performance. Additional analyses indicate that both investor selection and influence channels are at play. Overall, our findings highlight the central role of institutional investors for corporate ESG outcomes.
We document a significant role for nonbanks in financing the green transition following the Paris Agreement, primarily through lending partnerships with banks. Using textual analysis to identify green loans, we show that nonbanks participate in a greater number of green syndicated loans and commit larger amounts in response to corporate demand for green financing. Such nonbank investment in green loans is associated with more favorable loan terms and is consistent with a nonbank-led expansion in credit supply rather than bank-driven risk offloading. Nonbank investment is highly sensitive to policy signals, suggesting that regulatory transition risk is a key driver. Overall, our findings show the potential for nonbanks to support the transition but only under credible political commitment to climate goals.
We study gender differences in on-time loan payment responsiveness to collection mechanisms using randomized dunning text messages sent to 17,545 FinTech borrowers. Reminder text messages significantly reduce delinquency rates relative to a no-message control, with messages incorporating social or financial incentives proving more effective. Women are more responsive to social pressure, while men are more sensitive to financial incentives. These results are robust to observable control variables and matching methods. Channel analyses indicate that gender differences in responsiveness to the existence and size of the incentive explain the observed gender differences under the social incentive treatment. However, only gender differences in sensitivity to the existence of incentives explain the gender difference in financial incentive treatments. These findings inform practitioners and policymakers that some seemingly gender-neutral practices may create unintended gender disparities in financial markets.
We study information substitutability using a quasi-natural experiment: the pandemic-triggered lockdown that restricted physical interactions, impacting the collection, processing, and transmission of interaction-based information. By leveraging variations in the lockdown and its impact on proximate investment, we show that funds relying more on physical interactions for information significantly underperformed during the lockdown, compared to others. The loss of their information edge prompted funds to diversify portfolios and mitigate risk. These results suggest the irreplaceability of physical-interaction-based information. Moreover, while virtual platforms offer some buffer, they cannot entirely replace in-person meetings in generating equivalent information.
We examine global bank lending during geopolitical conflicts. Exploiting Russia’s 2014 countersanctions on the European agricultural industry, we analyze global banks’ syndicated lending to affected firms. We document a significant increase in credit supply to the sanctioned industry, accompanied by a significant increase in the shares of loans with lower spreads and longer maturities. The expansion of credit is not driven by incumbent banks alone. Instead, banks with little prior exposure to agriculture—particularly foreign banks headquartered in alternative export destinations where European firms are likely to redirect trade—account for a considerable proportion of the increased lending. This finding suggests banks actively rebalance their loan portfolio and strategic positioning in response to shifting trade flows. Our findings highlight the role of banks as intermediaries that adjust credit allocation across sectors during geopolitical disruptions, thereby cushioning targeted industries and facilitating their transition toward new markets.
Despite the proliferation of environmental regulations, how enforcement shapes banks’ management of climate-related financial risks remains underexplored. Using the Brazil- ian Amazon as a laboratory, we examine the impact of a shock to environmental law enforcement capacity on banks’ exposure to deforestation risks — an important yet un- derstudied dimension of environmental risk. Following enforcement weakening, credit to agribusinesses operating in deforestation-linked areas expanded and bank resources were reallocated toward regions with higher deforestation potential, reflecting both a relaxation of lending constraints and an increase in borrower demand as the expected costs of environmentally risky activities declined. Findings suggest that in the absence of stringent enforcement, deforestation risks may be insufficiently priced into credit decisions, even when environmental regulations are in place.
This study documents that financial innovation is associated with increased operational risks. Using supervisory data on operational losses from large U.S. bank holding companies (BHCs), we show that organizations with more financial patent innovation suffer higher operational losses per dollar of assets and more severe tail risk events. Matching estimations, instrumental variable regressions, and event studies around influential patents provide consistent evidence. There is significant heterogeneity in the effect across different innovation types and operational loss types. The result is more pronounced for BHCs with weaker risk management. Our findings have important implications for banking supervision and risk management in an environment of rapid technology adoption.
We evaluate the joint impact of structural liquidity regulation and unconventional monetary policy on Eurozone banks’ lending. Using an extensive bank-level quarterly dataset from 2008 to 2020, we study the introduction of the Net Stable Funding Ratio (NSFR) under Basel III and the European Central Bank’s Longer-Term Refinancing Operations (LTROs) and Targeted LTROs (TLTROs). We find that while the NSFR had no effect on aggregate lending, it led to an increase in short-term lending and a reduction in long-term lending, consistent with lower maturity transformation. LTRO participation is associated with higher medium- and long-term lending, and our results indicate that this effect is conditional on banks’ structural liquidity positions: banks with rising NSFRs were able to use LTRO and TLTRO funding to sustain long-term credit supply. These findings suggest that central bank liquidity interventions can mitigate the adjustment costs of tighter liquidity regulation during the transition period, enabling banks close to regulatory compliance to maintain longer-maturity lending.
Open Banking initiatives aim to make payment data interoperable across institutions. I examine the value of this interoperability in lending using data that link borrowers’ payment histories with non-bank small-business loans in India. Payment data improve lenders’ ability to screen and monitor loans beyond traditional sources, including credit bureaus. These information sources are complementary because they specialize in different determinants of repayment. Subsample analysis shows that payment histories primarily reflect real-time repayment ability, while a natural experiment removing borrower discretion confirms that credit bureaus primarily measure willingness to repay. Shifting to payment-based screening benefits most borrowers but disadvantages those with poor credit scores and thin payment records, highlighting distributional trade-offs in Open Banking implementation.
We investigate the transmission of monetary policy through the supply chains with US data on corporate linkages. Our analysis uncovers three key insights. First, contractionary monetary conditions lead to disruptions in financially constrained firms' purchases and sales. Second, these disruptions extend to the unconstrained suppliers and customers of such firms. Third, disruptions intensify when financially constrained firms purchase or sell specialized goods. These findings suggest that monetary tightening creates bottlenecks in supply chains, forcing firms to curtail business when they cannot substitute their constrained business partners. "Monetary policy bottlenecks" amplify the impact of monetary policy beyond the standard balance sheet channel of transmission.
Households exhibit “return chasing” behavior in the stock market, so stock market performance induces fluctuations in deposit supply. Using stock market performance as a shock to deposit supply, we trace out the relationship between bank market power and deposit demand elasticity. Bank market power leads to inelastic deposit demand, which attenuates the spillover effects of the stock market on local deposit markets. Counties with high bank market power also experience smaller declines in small business and mortgage lending following market upswings. In addition, investment related services help to retain deposits and alleviate price competition and deposit outflow pressures. Overall, our results suggest that bank market power insulates and stabilizes local deposit and lending markets from stock market fluctuations, and product differentiation through complementary services reduces the intensity of price competition.
To provide a safe haven for investors at all times, government money market funds face several challenges, which received little attention in prior studies. When Treasury bills are scarce, they need a flexible supplier of safe assets as a substitute for T-bills. The challenge compounds when government funds also experience large inflows. Conversely, when T-bills are abundant but with long maturities, government funds need complements to T-bills to manage interest rate risk. Federal Home Loan Banks satisfy both needs, offering large amounts of safe assets on short notice and with flexible repricing which allows funds to manage interest rate risk.
This paper estimates the elasticity of minority credit supply to deposit shares of Minority Depository Institutions (MDIs). I use within-county tract-level variation in exposure to the Community Reinvestment Act and show that if a census tract loses MDI presence following a merger between an MDI bank and a community bank, its minority mortgage credit declines by 40%. These effects are driven by the loss of operationally efficient MDIs, and about half of the overall impact is attributable to the loss of mission alone. A 1% increase in county market shares of such tracts leads to roughly a 3% decrease in county-level minority homeownership.
