Essays in Environmental and Supply Chain Topics in Finance

Abstract

This thesis comprises three essays in finance. The first two essays study how liquidity provision by the financial sector affects firms’ production decisions in response to shocks. The third essay studies the real and financial impacts of regulatory enforcement in an environmental setting.

The first chapter (joint with Victor Orestes and Thiago Christiano Silva) shows that firms experience large increases in sales and purchases after receiving cheaper liquidity. We focus on factoring, defined as the supplier-initiated sale of receivables. In Brazil, receivables funds (FIDCs) securitize receivables for institutional investors. By assembling a novel transaction-level dataset of factoring with other credit operations for all registered firms and FIDCs, we construct a shift-share instrument for factoring financing supply based on FIDC flows. We then use a novel combination of electronic payments, trade credit, and employer-employee matched data to estimate the impacts. A flow-induced increase in receivables demand reduces firms’ factoring interest rate. In response, firms demand more permanent labor and less temporary labor. In our model, these effects arise from factoring’s purpose of reducing cash inflow volatility, helping firms match inflows to outflows, which firms otherwise achieve at an efficiency cost through substitution across labor types..

The second chapter (joint with Victor Orestes and Thiago Christiano Silva) uses transaction-level data on payments, credit, and insurance to examine how Brazilian farmers responded to the severe frost of July 2021, a shock that affected coffee, a perennial crop whose plants are a major component of farm value. The frost shock reduced both output and the pledgeable value of farmers’ collateral. We find that insured farmers increased investment in the years following the shock, while uninsured farmers reduced investment and borrowing. We show how this pattern is consistent with models of imperfect pledgeability of a firm’s collateral, where constrained firms neither insure (ex-ante) nor fully recover from a shock (ex-post). Limited commitment endogenously generates under-insurance through the combination of upfront payment of the insurance premium with the tightening of borrowing constraints post-shock due to the decrease in total collateral. We discuss two equilibrium implications of this mechanism: the inefficacy of emergency credit lines in targeting liquidity constrained firms and the amplification of output volatility from the rising risk of extreme weather shocks.

The third chapter (joint with Ananya Kotia and Utkarsh Saxena) studies the aggregate impacts of court-ordered iron ore mining bans in India. The local sectoral ban is a command-and-control (CAC) policy that is commonly applied to natural resource settings, usually when the regulator has a signal of widespread non-compliance. The Supreme Court of India imposed bans on iron ore mining and outbound iron ore trade in two states in response to reports that mines operated under fake environmental permits and underpaid mining royalties. Using firm-level industrial survey data, mine-level output data, we decompose the bans’ effects into trade, production networks, and local labor demand channels. Our results indicate persistent declines in employment, capital stock, and borrowing by iron-consuming plants, despite the temporary duration of the ban. These findings highlight the economic spillovers caused by CAC policies, especially in industries that are upstream in the supply chain.