title: Three Essays in Empirical Finance
Creators: name: Brunner, Marc
Publisher: name: Universität Bern
Year: 2023
Subjects: subject: 330 Economics

description: Since the Great Financial Crisis in 2008 and the subsequent European sovereign debt crisis, the question of economic stability has arisen in many Western countries. One threat to this stability are zombie firms. These firms cannot pay their debts and have only a small chance of survival but are kept alive by banks and other financiers. These lenders provide the companies with additional capital at favourable conditions to avoid realizing any losses from bankruptcy. From a economic policy perspective, zombie firms increase the entry barriers for more productive firms, therefore changing the competitive environment, and slow down economic growth. In the wake of the Corona pandemic and the associated handsome support for firms, zombies are also known to the general public. Therefore, I dedicate the first two chapters of my thesis to said firms. In the first chapter, I investigate the zombie phenomena in the US across multiple dimensions, before focusing on how those firms raise capital in the US. In the first half, I start by looking at simple firm characteristics and replicate findings from the literature. My results show that, on average, 10% of all firm-year observations across the sample period from 1975 to 2018 are classified as zombies. Interestingly, the number of zombie firms is higher at the beginning of the sample resulting in a negative time trend. I then report detailed industry and region trend of the zombie share. While some industries generally suffer from a higher zombie share, a similar observation does not emerge regarding the regional distribution. In the second half, I focus on the capital structure of zombies and use three additional data sets to describe how zombie firms raise capital. As expected, zombie firms are more levered, however, they raise more equity than debt capital, suggesting that they are in the process of deleveraging. Using DealScan Loan data, I find that zombie firms raise smaller loans that are more often secured but they do not need to pay higher interest rates. This is also true for the second investigated source of debt capital: bonds. Last, I also cover zombie firms' Seasoned Equity Offerings (SEO) characteristics using SDC Platinum SEO data. Again, my results do not suggest that zombie firms need to pay a premium, but their SEOs are significantly smaller. The second chapter is joint work with Angela De Martiis and Philip Valta. We investigate the effect of competition on zombie firms' existence and financial policy choices in the US. In order to mitigate the endogeneity issue arising from the simultaneous effect between zombies and competition, we use an Instrumental Variable framework suggested in the literature. The main idea of this approach is to use the import penetration from China into eight developed countries as an instrument for the import penetration from China into the US. By establishing causality, we show that the asset-weighted zombie share is negatively affected after an increase in competition. We call this the cleansing effect, and we find, that it is stronger for industries with an already high level of competition, i.e. with low concentration and low margins. In order to identify the channel which drives down the asset-weighted zombie share, we extend our analysis to the default and recovery likelihood of zombie firms. Both variables are not affected by changes in competition. Therefore, we run firm-level regressions and find that zombies scaled down their assets more than healthy firms as a reaction to an increase in competition. This then drives the negative effect on the zombie share. Additionally, zombies also hold less cash, issue less equity, and obtain smaller loans as a reaction to more competition compared to healthy firms. Finally, the last chapter of my thesis is situated on the overlap between macroeconomics and household finance and is written by Jonas Meier, Armando Näf, and myself. While many different models exist to explain the heterogeneity in returns to wealth, empirical evidence is scarce. We build on results which identify type and scale effects as important drivers of returns to wealth and extend them by modelling the whole distribution of returns using distributional regressions techniques. This allows us to unveil the heterogenous effect of wealth on the return to wealth unconditional on all other observables, i.e. the pure effect of wealth on the heterogeneity of returns to wealth. Our results are based on an extensive data set with administrative tax records of individual households, which covers all taxpayers in the canton of Bern, Switzerland, from 2002 to 2017. They show that the two drivers of returns are not additively separable and that scale dependence becomes more influential for high-type investors. We also find that the effect of scale dependence increases with the asset class's volatility. Altogether, my thesis provides new empirical insights in financial economics. The first paper shows that zombie firms are also present in the US and that they access the financial market similarly to healthy firms, but raise less capital and more equity in order to reduce their leverage, therefore adding descriptive empirical evidence to the literature about zombie firms. The contribution of the second paper is to provide an identification method based on which one can conclude that an increase in competition has a negative effect on the zombie share. Finally, the third paper adds to the empirical literature about the heterogeneity in returns to wealth by estimating the unconditional effect of wealth on the whole distribution of returns to wealth using distributional regressions.