Essays on the Effects of Financing Frictions

Thesis advisor: Philip E. StrahanIn the first essay of this dissertation I examine the bank credit supply and industry growth effects stemming from the introduction of bank account debit (BAD) taxes using a sample of Latin American countries between 1986 and 2005. I first show that the introduction of BAD taxes is followed by a reduction in the provision of bank credit to the private sector. I identify that a key channel through which these taxes affect credit is by creating a strong incentive to hold cash and reduce the use of bank deposits. I also provide evidence that their implementation ultimately affects economic growth, mainly by reducing the growth prospects of industries that are more susceptible to distortions in the supply of credit. In the second chapter I use a large sample of private firms in Colombia to investigate the impact of the introduction and changes of BAD taxes on the financing and investment decisions of firms. I first document that bank leverage decreases from an average of 23% in the years before the tax to 18% in the post-tax years. Furthermore, using a differences-in-differences empirical strategy, I find that small-risky firms reduce more their leverage and capital expenditures relative to large-high credit quality firms, even after controlling for firms' demand characteristics. In the last essay, written jointly with Heitor Almeida, Miguel A. Ferreira and Igor Cunha, we exploit the sovereign ceiling policy by credit rating agencies to show that sovereign rating downgrades have a real impact on firm investment and financial policy. We identify these causal effects by exploring the effect of sovereign downgrades on corporate ratings that are due to the rating agencies' sovereign ceiling rules. We find that sovereign downgrades lead to greater reduction in investment and leverage at firms that are at the sovereign rating bound than at otherwise similar firms that are below the bound. Consistent with a contraction in capital supply, bond yields of firms at the bound increase more than yields of firms below the bound.Thesis (PhD) — Boston College, 2014.Submitted to: Boston College. Carroll School of Management.Discipline: Finance