Essays on financial intermediation and corporate finance

Abstract

This thesis consists of three essays exploring the links between financial intermediation and corporate finance Government Owned Banks GOBs have other explicit or implicit objectives apart from profit maximization In the first essay we study whether this affects the liquidation risk of firms borrowing from GOBs Using the natural experiment of securitization reform in India that increased firms 8217 liquidation risk we find that the firms borrowing exclusively from GOBs did less reduction in secured debt usage compared to other firms In the cross section the effect is more substantial in the subsample of firms that are more likely to face financial distress These results suggest that borrowing from GOBs have less liquidation risk In the second essay we study the evolution of firms 8217 leverage around systemic banking crises Using a sample of 40 recent systemic banking crises we find that firms 8217 leverage is procyclical around banking crises similar to the evolution of aggregate credit around financial crises documented in the literature In the cross section firms 8217 leverage is more procyclical in banking crises in which aggregate bank credit is also more procyclical Furthermore firms 8217 leverage is more procyclical for banking crises in countries with less developed financial markets proxied by emerging market economies bank based financial system relatively small size of public debt markets and in those countries where firms rely more on short term debt In the third essay we study the effect of financial crises on firms 8217 cash holdings with a sample of 40 recent systemic banking crises Consistent with the hypothesis that financial crises increase the likelihood of future crises and increase precautionary liquidity demand we find that post crisis firms increase their cash holdings newline newline