Is Bank Debt Special for the Transmission of Monetary Policy? Evidence from the Stock Market Filippo Ippolito - Ali Ozdagli - Ander Perez UPF, Barcelona GSE & CEPR - FRB of Boston - UPF & Barcelona GSE 18 October 2013 - 16th Annual DNB Research Conference 1 / 52
Introduction Questions I Is bank lending to …rms special for monetary policy transmission? I If so, why is it special? 2 / 52
Introduction Questions I Is bank lending to …rms special for monetary policy transmission? I If so, why is it special? Strategy I Compare stock price reaction to monetary policy shocks of bank-dependent and non-dependent …rms 2 / 52
Introduction Questions I Is bank lending to …rms special for monetary policy transmission? I If so, why is it special? Strategy I Compare stock price reaction to monetary policy shocks of bank-dependent and non-dependent …rms Challenges I Measuring bank-dependence ) answer: new detailed debt structure data I Identifying transmission mechanisms 1. bank lending channel ) answer: bank-…rm match 2. pass-through channel ) answer: interest rate hedging activity by …rms 2 / 52
Transmission Mechanisms 3 / 52
Transmission Mechanisms 4 / 52
Overview of Results Is bank lending to …rms special for monetary policy transmission? I Yes I Daily stock price response to 1% surprise increase in fed funds target I around � 4 % on average I around � 1 % more if 2 std dev increase in (bank debt/assets) 5 / 52
Overview of Results Is bank lending to …rms special for monetary policy transmission? I Yes I Daily stock price response to 1% surprise increase in fed funds target I around � 4 % on average I around � 1 % more if 2 std dev increase in (bank debt/assets) Why is it special? 5 / 52
Overview of Results Is bank lending to …rms special for monetary policy transmission? I Yes I Daily stock price response to 1% surprise increase in fed funds target I around � 4 % on average I around � 1 % more if 2 std dev increase in (bank debt/assets) Why is it special? I Bank lending channel I Bank dependent …rms borrowing from …nancially healthy banks less responsive 5 / 52
Overview of Results Is bank lending to …rms special for monetary policy transmission? I Yes I Daily stock price response to 1% surprise increase in fed funds target I around � 4 % on average I around � 1 % more if 2 std dev increase in (bank debt/assets) Why is it special? I Bank lending channel I Bank dependent …rms borrowing from …nancially healthy banks less responsive I Interest rate pass-through channel I Interest rate hedgers are less responsive 5 / 52
Data Sources and Sample I Sample: U.S. publicly listed …rms, 2003-2008 I No detailed …rm debt structure data pre 2003 I No conventional monetary policy post 2008 I Firm characteristics: Capital IQ and Compustat, annual level I Stock returns: CRSP I Monetary policy surprises: calculated as in Kuttner (2001) and Bernanke and Kuttner (2005) I Bank characteristics: Call Reports I Bank-Firm matching: LPC Dealscan (syndicated loans) I Interest rate hedging by …rms: annual 10-K …lings with SEC 6 / 52
E¤ect of Monetary Policy Surprises Across Subsamples Similar response of stock prices to federal funds rate surprises across sample periods 7 / 52
Is Bank Debt Special? 8 / 52
A New Bank-Dependence Measure I Capital IQ (CIQ) is provided by Standard and Poor’s and contains detailed debt structure as follows: I Commercial paper (CP) I Bank debt = Drawn Credit Lines (RC) + Term loans (TL) I Bonds = Senior (SBN) + Subordinated (SUB) I Capital leases (CL) I Other debt (Other): other short-term borrowings, trade credit, deferred credits and trust-preferred securities 9 / 52
A New Bank-Dependence Measure I Capital IQ (CIQ) is provided by Standard and Poor’s and contains detailed debt structure as follows: I Commercial paper (CP) I Bank debt = Drawn Credit Lines (RC) + Term loans (TL) I Bonds = Senior (SBN) + Subordinated (SUB) I Capital leases (CL) I Other debt (Other): other short-term borrowings, trade credit, deferred credits and trust-preferred securities I We de…ne bank dependence as (Total Bank Debt)/(Total Assets) 9 / 52
Descriptive Statistics 10 / 52
Descriptive Statistics 11 / 52
Descriptive Statistics 12 / 52
Is Bank Debt Special? I Speci…cation = β 0 + β 1 Surprise t + β 2 ( BankDebt / At ) i , t � 1 Ret i , t + β 3 Surprise t � ( BankDebt / At ) i , t � 1 + γ Controls i , t � 1 + λ Surprise t � Controls i , t � 1 + ε i , t , 13 / 52
Is Bank Debt Special? I Speci…cation = β 0 + β 1 Surprise t + β 2 ( BankDebt / At ) i , t � 1 Ret i , t + β 3 Surprise t � ( BankDebt / At ) i , t � 1 + γ Controls i , t � 1 + λ Surprise t � Controls i , t � 1 + ε i , t , I Bank debt specialness: β 3 6 = 0 13 / 52
Is Bank Debt Special? 14 / 52
Is Bank Debt Special? Bank dependent …rms are more responsive to monetary policy shifts 15 / 52
Further Robustness: Short Term Debt E¤ect? Higher sensitivity of bank debt users not due higher exposure to short-term debt 16 / 52
Further Robustness: Omitted Variables Bias? I Hausman test based on asset pricing theory I Compare …xed-e¤ects with OLS I any variable that makes stock more responsive to mon pol should directly a¤ect …rms’ expected returns I OVB should a¤ect not only coe¢cient of bank dependence interacted with surprise, but also uninteracted I Hausman test does not reject null of exogeneity 17 / 52
Further Robustness: Omitted Variables Bias? I Hausman test based on asset pricing theory I Compare …xed-e¤ects with OLS I any variable that makes stock more responsive to mon pol should directly a¤ect …rms’ expected returns I OVB should a¤ect not only coe¢cient of bank dependence interacted with surprise, but also uninteracted I Hausman test does not reject null of exogeneity I Analyze determinants of bank debt usage 17 / 52
Determinants of Bank Debt Usage Bank debt users not more likely to be risky or interest rate sensitive 18 / 52
Why is Bank Debt Special? 19 / 52
Bank Centered Transmission Mechanisms I Bank lending to …rms is special for monetary policy transmission I Bank dependent …rms are more responsive 20 / 52
Bank Centered Transmission Mechanisms I Bank lending to …rms is special for monetary policy transmission I Bank dependent …rms are more responsive I Bank centered channels of monetary policy transmission that predict stronger responsiveness 20 / 52
Bank Centered Transmission Mechanisms I Bank lending to …rms is special for monetary policy transmission I Bank dependent …rms are more responsive I Bank centered channels of monetary policy transmission that predict stronger responsiveness I Bank Lending Channel X 20 / 52
Bank Centered Transmission Mechanisms I Bank lending to …rms is special for monetary policy transmission I Bank dependent …rms are more responsive I Bank centered channels of monetary policy transmission that predict stronger responsiveness I Bank Lending Channel X I Interest Rate Pass-Through Channel X 20 / 52
Bank Centered Transmission Mechanisms I Bank lending to …rms is special for monetary policy transmission I Bank dependent …rms are more responsive I Bank centered channels of monetary policy transmission that predict stronger responsiveness I Bank Lending Channel X I Interest Rate Pass-Through Channel X 20 / 52
The Bank Lending Channel 21 / 52
The Bank Lending Channel I Loan supply of …nancially constrained banks more sensitive to monetary policy I Theory I Bernanke and Blinder (1988), Bernanke and Gertler (1995), Stein (1998), Bolton and Freixas (2006), Gertler and Karadi (2009) 22 / 52
The Bank Lending Channel I Loan supply of …nancially constrained banks more sensitive to monetary policy I Theory I Bernanke and Blinder (1988), Bernanke and Gertler (1995), Stein (1998), Bolton and Freixas (2006), Gertler and Karadi (2009) I Evidence I bank size : Kashyap and Stein (1995), Kashyap and Stein (2000) I liquidity : Kashyap and Stein (2000), Jimenez, Ongena, Peydró and Saurina (2012) I capitalization/leverage : Kishan and Opiela (2000), Jimenez, Ongena, Peydró and Saurina (2012) I a¢liation with holding company : Ashcraft (2006) 22 / 52
The Bank Lending Channel I Loan supply of …nancially constrained banks more sensitive to monetary policy I Theory I Bernanke and Blinder (1988), Bernanke and Gertler (1995), Stein (1998), Bolton and Freixas (2006), Gertler and Karadi (2009) I Evidence I bank size : Kashyap and Stein (1995), Kashyap and Stein (2000) I liquidity : Kashyap and Stein (2000), Jimenez, Ongena, Peydró and Saurina (2012) I capitalization/leverage : Kishan and Opiela (2000), Jimenez, Ongena, Peydró and Saurina (2012) I a¢liation with holding company : Ashcraft (2006) I Firms …nd it hard to substitute bank lending I Khwaja and Mian (2008), Chava and Purnanandam (2011), Jimenez, Ongena, Peydró and Saurina (2012) 22 / 52
Challenge: Matching Firms to Banks I Use LPC Dealscan database of syndicated lending I wide coverage I Calculate for each …rm-bank-year : I share lent by each bank in all lending received in previous 5 years I robustness: only leads, vs. leads and participants I Calculate for each …rm-year : I weighted average …nancial health of all banks (weight: share lent by each bank) 23 / 52
Matching Firms to Banks 24 / 52
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