VGSF - WU Vienna - LC

Christian Laux, WU Wien

Campus WU D3.0.225 11:00 - 12:30

Organizer VGSF

As part of the ser­ies of the "Fin­ance Re­search Sem­inar", VGSF wel­comes Chris­tian Laux from the WU Wien to present his re­search pa­per.
Per­sonal Webpage

Pa­per

The Value of Ac­count­ing Noise: Credit Line Re­voc­a­tions and Ag­greg­ate Li­quid­ity Shocks

(joint with Maria Chader­ina and An­gel Ten­gu­lov)

We dis­cuss a novel role for cov­en­ants and ac­count­ing per­form­ance meas­ures in credit lines. Dur­ing ag­greg­ate li­quid­ity short­ages, banks need to ra­tion li­quid­ity. Ab­sent com­plete con­tracts, credit line cov­en­ants that al­low re­voc­a­tions pro­tects banks against severe ag­greg­ate li­quid­ity shocks where the num­ber of firms that draw on their credit line ex­ceed banks avail­able li­quid­ity. The op­timal im­pli­cit con­tract im­plies that banks re­voke credit lines of cov­en­ant vi­ol­at­ors only after an ag­greg­ate shock, not in nor­mal times. Noise in ac­count­ing per­form­ance meas­ures in­tro­duces ran­dom­ness in cov­en­ant vi­ol­a­tions, which sub­sti­tutes for bank dis­cre­tion when banks have to ra­tion li­quid­ity among ho­mo­gen­eous firms after an ag­greg­ate shock. Con­sist­ent with the pre­dic­tion of our model, we find a pos­it­ive as­so­ci­ation between cov­en­ant vi­ol­a­tions and credit line re­voc­a­tions in the crisis of 2007 and 2008, con­trolling for firm fun­da­ment­als, but not out­side the crisis.

You can find a ver­sion of the pa­per un­der the fol­low­ing link (PA­PER). But please bear in mind that the au­thors are cur­rently re­vis­ing the pa­per with sub­stan­tial changes in the main the­or­et­ical part



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