Three Essays in Financial Economics

This thesis investigates the long-run development of credit markets around the world and the legal frameworks governing them. Chapter 1 begins by discussing open questions about financial sector development and financial crises, in particular the role of financial regulation and bankruptcy frameworks. One striking pattern that emerges is the relative paucity of comparable cross-country data on the structure of debt markets. Chapter 2 thus introduces a new resource for macro-finance research: a long-run database on the outstanding amount and sectoral allocation of credit in 120 countries all over the globe from 1910. I discuss in detail how I constructed comparable data on the sectoral level from over 600 archival sources and present a range of new stylized facts. Perhaps most strikingly, corporate credit (relative to GDP) stopped expanding all over the world around 1980, while household credit has skyrocketed. Importantly, the rise of household credit is not only driven by mortgages but also consumer credit – particularly in emerging economies. I then test empirically which theories can explain these trends in credit allocation. A potential policy implication some may want to draw from the stylized facts in Chapter 2 is that regulators should target particular sectors to influence the allocation of credit. To this end, many central banks around the world regularly use macroprudential tools, which are supposed to prevent a build-up of systemic risk. In chapter 3, I show that such targeted policies historically exhibit a large, robust electoral cycle around the world. More precisely, prudential tools are considerably less likely to be tightened, and more likely to be loosened, in pre-election quarters – particularly when upcoming elections are expected to be close. Central bank independence, which is thought to ease political economy constraints, does not appear to be an important moderating factor for the election cycle in prudential regulation; it does, however, eliminate electoral cycles in monetary policy. Taken at face value, these findings suggest that the more immediate effect of prudential policies on the median voter might make them more difficult to implement than previously imagined. In Chapter 4, I turn to another legal determinant of credit market outcomes: the efficiency of bankruptcy courts. While it is well known that legal frameworks matter for the development of debt markets, much less is known about the implementation of law into practice, i.e. debt enforcement. I study this question using quasi-random exposure of firm borrowers to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) in the United States. BAPCPA fundamentally reformed consumer bankruptcies, which resulted in the largest drop of bankruptcy filings recorded in US history, particularly in districts with a historically higher share of consumer cases. Because BAPCPA left bankruptcy rules for firms largely unchanged, I can identify the causal effect of reduced court congestion on financing terms. I find that the drop in caseload per judge was associated with an improvement in interest rate spreads and loan maturities. A back-of-the-envelope calculation implies that the social costs of busy courts are large. Chapter 5 provides implications of my thesis for policy makers and future research. I also discuss some preliminary results from ongoing research into how credit is allocated during credit booms and their association with subsequent banking crises.