Date of Graduation

8-2014

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Finance

Advisor/Mentor

Lee, Wayne Y.

Committee Member

Yeager, Timothy J.

Second Committee Member

Malakhov, Alexey

Keywords

Bank Lending Channel; Credit Rationing; Debt Maturity; Financial Crisis; Government Intervention; Resolution Mechanisms

Abstract

This dissertation consists of three essays that study the relationship between distress and credit and the role this relationship has in determining corporate investment and economic activity. The first essay studies the supply of credit during the recent financial crisis. It shows that distress in the banking sector led to bank credit rationing, which a portion of nonfinancial borrowers palliated by migrating to the public market for credit. The overall reduction in credit, however, was followed by a severe drop in corporate investment, which in time led to a fall in the levels of aggregate production.

The second essay examines how distress in the banking sector affects credit supply in two separate events: the credit crunch of early 1990s and the financial crisis of late 2000s. While the former is broadly thought of as a relatively mild crisis when compared with the latter, the fall in bank credit that they carried is comparable by certain measures. Government intervention, the paper argues, accounts for the comparatively short duration of and fast recovery from the second crisis.

The third essay investigates the role of aggregate economic distress on the maturity of debt, which ultimately affects investment in long-term assets. The paper predicts and shows that increases in the aggregate distress lead lenders to prefer shorter maturities. This effect can be empirically observed in changes in maturity of new debt issues. Moreover, it is strong enough to modify the temporary financial structure of nonfinancial corporations.

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