Essays on Firm Responses to Prudential Regulation and Monetary Policy

Abstract

This thesis consists of 3 chapters analyzing how firms respond to changes in regulation and monetary policy. In chapter 1, I study how investor horizons affect corporate payout and investment policies using the 1982 share repurchase liberalization in the US as a natural experiment. Following the reform, firms with greater pre-reform short-termist ownership increase payouts by .85% of total assets relative to firms with a more long-term investor base. The increase in payouts is mirrored by an equally sized decline in investment. Tests exploiting newly digitized insider trading data support that the results are driven by myopic considerations, rather than reduced agency costs following the reform. Chapter 2 studies the effects of bank payout restrictions, imposed during the COVID-crisis in 2020, on risk-shifting incentives within US banks. Using a high-frequency differences-in-differences empirical strategy, I show that when payouts are restricted for Fed-supervised banks, their equity prices fall while their debt values appreciate differentially. In sum, these results indicate that payout restrictions shift risk from debt towards equity holders while the effects revert upon relaxation of the restrictions. Moreover, removing the restrictions is followed by higher payouts and by differentially stronger growth in riskier (non-investment grade) lending, showing that payout and risk-taking choices are complements during this episode. While lending portfolios become riskier, spreads charged on loans decline, suggesting risk-shifting by bank equity holders. Chapter 3, co-authored with Ernest Liu, Atif Mian, and Amir Sufi, addresses the question whether low interest rates contribute to the rise in market concentration. Using data on firm financials and high frequency monetary policy shocks, we find that falling interest rates disproportionately benefit industry leaders, especially when the initial interest rate is already low. A decline in the interest rate disproportionately lowers the cost of borrowing of industry leaders relative to industry followers. Leaders take advantage of the lower cost of borrowing to raise additional debt financing, increase leverage, boost capital investment, and conduct acquisitions. The findings support that extremely low interest rates may be a culprit in explaining the rise of superstar firms in the U.S. economy.