Two Essays in Banking and Corporate Finance

Abstract

This dissertation attempts to address two research questions. In the first essay "Bank Regulation, Cost of Borrowing, and Product Market Predation on Borrowers", I study the effect of bank regulation on the microeconomic behaviors of industrial firms. Using a regulatory change by the Federal Reserve Board in 2014, a shock that radically modifies requirements for Foreign Banking Organizations (FBOs), relative to domestic Bank Holding Companies (BHCs), and a difference-indifferences approach, I find this new rule causes FBOs to significantly raise loan spreads, relative to domestic BHCs, during the post period. Such actions by FBOs have effects on the investment decisions and financial performance of their borrowers. To deter predation behaviors by their rivals, FBO borrowers cut prices to maintain sales growth. They also cut SG&A expenses and Capex to maintain operating profitability. Despite the strategic adjustments, FBO borrowers in highly competitive markets are still more vulnerable to predation by rivals, as evidenced by a higher probability of being acquired by either rivals or private equity firms. These findings show that bank regulation can have unintended consequences in shaping industry structure through product market competition channel. In the second essay, "How does lender health affect covenant-violating borrowers?", co-authored with Adam C. Kolasinski and Jack Bao, we study the causal impact of lender health on covenant violating borrowers. Using the Emerging Market Debt Crises of the late 1990s, a shock that directly impacted some U.S. banks but not their domestic borrowers, and difference-in-differences, we find that banks exposed to the crises become relatively more likely to be stringent with covenant violators. Such stringency has real effects, as covenant violators become more likely to suffer a distressed delisting if their lenders are crisis-exposed. We also find effects for lender health on borrower investments, but these effects are not specific to covenant-violating borrowers.