Essays in corporate finance

Abstract

This thesis consists of three essays covering topics in empirical corporate finance with an emphasis on banking relationships and its effect on liquidity constraints and business growth. In particular, it investigates the effect of monetary capital and human capital constraints and the role of banking relationships to relax both constraints. The first essay studies how the number of bank relationships affects the liquidity constraints of businesses. The second essay investigates how accounting training can affect the liquidity constraints of entrepreneurs finally the third essay studies the effect of credit insurance as a mechanisms to reduce liquidity constraints. Further details of each essay are included below: In Chapter 1, I empirically explore whether firms have a target for the number of banks from which they borrow, and whether having multiple bank relationships has an impact on firms' liquidity situation. A bank merger in Chile provides a quasi-experiment as it constitutes an exogenous reduction in the number of lenders for firms that were previously borrowing from both merging banks. I find that a significant percentage of firms whose number of bank relationships was reduced by the merger regain their original number of lenders. In particular, firms whose number of bank lending relationships was reduced from 2 to 1 as a result of the merger have a 23% higher probability of adding a new bank lending relationship in the 5 years following the merger compared to similar firms unaffected by the merger.

(cont.) Overall, I find that a reduction in firms' number of bank lenders resulting from the merger reduced firms' access to credit. In particular, a reduction from two to one bank lending relationship on average generated a 14.4% decrease in loan size for the affected companies compared to firms unaffected by the merger. In Chapter 2 (joint work with Antoinette Schoar and Greg Fischer) We conduct a randomized impact evaluation of a training program for micro-entrepreneurs in the Dominican Republic that allows us to identify the effects of cash management and accounting techniques on business practices and business performance. To a randomly-selected fraction of the entrepreneurs enrolled in the training program we also provided on-site accounting and cash management advice. We find that micro entrepreneurs are reluctant to incorporate complex and time-consuming accounting practices into their businesses, however, simpler cash flow management practices were widely adopted by trained entrepreneurs. People who were taught basic cash flow management techniques increased their sales up to 80%. The increase in sales during bad performance periods was substantially more significant than the average increase in sales. This suggests that the most important mechanism through which training improved performance was by reducing the effect of drawbacks in the businesses. Complex accounting techniques only increased sales when combined with on-site advice, most likely because these practices where not consistently implemented when on-site advice was not provided.

(cont.) In Chapter 3 (joint work with Kevin Cowan and Alvaro Yafies), we use Partial Credit Guarantee Schemes in Chile to study how such a government intervention in the financial system can affect the access that entrepreneurs have to the formal financial system. We also explore how these schemes affect the default rates on the guaranteed loans. We find that partial credit guarantee schemes increase the number of loans and the aggregate amount lent to small and medium size businesses. In addition, we find that credit guarantees increase the debt capacity of individual entrepreneurs, holding assets fixed. We also find that Credit Guarantees increase default rates, but the evidence suggests that this result is explained mainly by misalignment of bank incentives rather than moral hazard in the context of client practices.