Firms’ Management of Infrequent Shocks

Published on Dec 3, 2019in Journal of Money, Credit and Banking
· DOI :10.1111/JMCB.12674
Benjamin Collier6
Estimated H-index: 6
(TU: Temple University),
Andrew F. Haughwout19
Estimated H-index: 19
(Federal Reserve Bank of New York)
+ 2 AuthorsMichael A. Stewart1
Estimated H-index: 1
(Federal Reserve Bank of New York)
We examine businesses’ financial management of a rare, severe event using detailed firm-level data collected following Hurricane Sandy in the New York area. Credit played a prominent role in financing recovery; more negatively affected firms took on debt because of Sandy (38%) than received insurance payments (15%) in our data. Negatively affected firms were often credit constrained after the shock. While firms’ demand for insurance is often explained by financing frictions, we find that the most credit constrained firms after the event, younger firms and smaller firms, were the least likely to insure before it.
  • References (37)
  • Citations (1)
📖 Papers frequently viewed together
13 Citations
198 Citations
78% of Scinapse members use related papers. After signing in, all features are FREE.
In this paper, I show that high‐cost credit helps households smooth consumption following periods of temporary financial distress. After experiencing distress—that is, extreme weather events—I find that access to high‐cost payday lending mitigates declines in overall spending and nondurable goods spending generally. The results are particularly concentrated among households with a higher propensity to use payday credit or that have limited alternatives: lower income households, households with l...
1 CitationsSource
#1Allen N. Berger (USC: University of South Carolina)H-Index: 81
#2Christa H. S. Bouwman (A&M: Texas A&M University)H-Index: 15
Last. Dasol Kim (The Treasury)H-Index: 4
view all 3 authors...
We use novel monthly survey data from 1993 to 2012 on small business managerial perceptions of financial constraints and other conditions, matched with information on banks in their local markets. The data suggest that small banks have comparative advantages in alleviating these constraints. These advantages tend to be greater during adverse economic conditions and do not appear to decrease or increase secularly. Small banks also appear to have comparative advantages in providing liquidity insur...
29 CitationsSource
#1Manuel AdelinoH-Index: 10
#2Song MaH-Index: 5
Last. David T. RobinsonH-Index: 24
view all 3 authors...
New firms are an important source of job creation, but the underlying economic mechanisms for why this is so are not well understood. Using an identification strategy that links shocks to local income to job creation in the nontradable sector, we ask whether job creation arises more through new firm creation or through the expansion of existing firms. We find that new firms account for the bulk of net employment creation in response to local investment opportunities. We also find significant gro...
18 CitationsSource
We study how listing status affects investment behavior. Theory offers competing hypotheses on how listing-related frictions affect investment decisions. We use detailed data on 74,670 individual projects in the U.S. natural gas industry to show that private firms respond less than public firms to changes in investment opportunities. Private firms adjust drilling activity for low capital-intensity investments. However, they do not increase drilling in response to new capital-intensive growth opp...
29 CitationsSource
#1Lucia FosterH-Index: 13
#2John Haltiwanger (UMD: University of Maryland, College Park)H-Index: 68
Last. Chad Syverson (U of C: University of Chicago)H-Index: 28
view all 3 authors...
It is well known that new businesses are typically much smaller than their established industry competitors, and that this size gap closes slowly. We show that even in commodity-like product markets, these patterns do not reflect productivity gaps, but rather differences in demand-side fundamentals. We document and explore patterns in plants’ idiosyncratic demand levels by estimating a dynamic model of plant expansion in the presence of a demand accumulation process (e.g., building a customer ba...
129 CitationsSource
#1Neus Herranz (UIUC: University of Illinois at Urbana–Champaign)H-Index: 9
#2Stefan KrasaH-Index: 17
Last. Anne P. Villamil (UI: University of Iowa)H-Index: 16
view all 3 authors...
How do entrepreneurs vary firm size, capital structure, and default to manage risk? We show that more risk-averse entrepreneurs run smaller, more highly leveraged firms and default less, because running a smaller firm with higher debt reduces personal funds at risk in the firm. Optimal default depends on ex ante debt, consumption forgone from firm liquidation, and owner capacity to inject funds. We show that entrepreneurs sacrifice current consumption in the hope of future success that never mat...
25 CitationsSource
#1Diego Amaya (WLU: Wilfrid Laurier University)H-Index: 4
#2Geneviève Gauthier (HEC Montréal)H-Index: 12
Last. Thomas-Olivier Léautier (University of Toulouse)H-Index: 7
view all 3 authors...
This paper develops a dynamic risk management model to determine a firm's optimal risk management strategy. The risk management strategy has two elements: first, until leverage is very high, the firm fully hedges its operating cash how exposure, due to the convexity in its cost of capital. When leverage exceeds a very high threshold, the firm gambles for resurrection and stops hedging. Second, the firm manages its capital structure through dividend distributions and investment. When leverage is ...
4 CitationsSource
We consider statistical inference for regression when data are grouped into clusters, with regression model errors independent across clusters but correlated within clusters. Examples include data on individuals with clustering on village or region or other category such as industry, and state-year differences-in-differences studies with clustering on state. In such settings, default standard errors can greatly overstate estimator precision. Instead, if the number of clusters is large, statistic...
1,194 CitationsSource
#1Rajkamal Iyer (MIT: Massachusetts Institute of Technology)H-Index: 12
Last. Antoinette SchoarH-Index: 29
view all 4 authors...
We study the credit supply effects of the unexpected freeze of the European interbank market, using exhaustive Portuguese loan-level data. We find that banks that rely more on interbank borrowing before the crisis decrease their credit supply more during the crisis. The credit supply reduction is stronger for firms that are smaller, with weaker banking relationships. Small firms cannot compensate the credit crunch with other sources of debt. Furthermore, the impact of illiquidity on the credit c...
172 CitationsSource
#1John HaltiwangerH-Index: 68
#2Ron S. JarminH-Index: 25
Last. Javier MirandaH-Index: 19
view all 3 authors...
The view that small businesses create the most jobs remains appealing to policymakers and small business advocates. Using data from the Census Bureau's Business Dynamics Statistics and Longitudinal Business Database, we explore the many issues at the core of this ongoing debate. We find that the relationship between firm size and employment growth is sensitive to these issues. However, our main finding is that once we control for firm age, there is no systematic relationship between firm size an...
604 CitationsSource
Cited By1
Abstract Warm or cold, wet or dry, weather impacts almost every industry as 70% of businesses are exposed to unexpected variations that influence demand for goods and services. The financial losses caused by adverse weather that did not seem material enough to have an impact or to require being managed a decade ago, may now do so as the frequency and severity of abnormal weather have dramatically increased. A surge in investigating the contribution of weather to financial distress is also prompt...
4 CitationsSource