Young Firms, Old Capital, with
Song Ma and Justin Murfin Journal of Financial Economics, 2022, 146(1): 331-356.
Across a broad range of equipment types and industries, we document a pattern of local capital reallocation from older firms to younger firms.
Start-ups purchase a disproportionate share of old physical capital previously owned by more mature firms. The evidence is consistent with financial constraints
driving differential demand for vintage capital. The local supply of used capital influences start-up entry, job creation, investment choices, and growth,
particularly when capital is immobile. Meanwhile, as suppliers of used capital, incumbents accelerate capital replacement in the presence of more young firms. The evidence suggests previously
undocumented benefits to co-location between old and young firms.
Using loan-level data on millions of used-car transactions across hundreds of lenders, we study the consumer response to exogenous variation
in credit terms. Borrowers offered shorter maturity decrease expenditures enough to offset 60% to 90% of the monthly payment increase. Most of this is driven
by shifting toward lower-quality cars, but affected borrowers offset 20% to 30% of a monthly payment shock by negotiating lower prices for equivalent cars.
Our results suggest that durable goods prices adjust to reflect credit terms even at the individual level, with one year of additional loan maturity
increasing a car's price by 2.8%.
Comparables Pricing, with Justin Murfin Review of Financial Studies, 2019, 32(2): 688-737.
Finance professionals commonly set prices based on the analysis of recently-closed, comparable transactions. Using data on syndicated loans, we exploit the lag
between loans' closing dates and their inclusion in a widely-used comparables database to identify the effect of past transactions on new transaction pricing. Comparables pricing
is an important determinant of individual loan spreads, but a failure to account for overlap in information across loans leads to pricing mistakes. Comparables used repeatedly are
overweighted as they develop redundant channels of influence on later transactions. Market conditions prevailing at the time a comparable was priced also unduly influence subsequent
loans.
We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their
products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive backed models have lower price depreciation. The
evidence is consistent with captive finance helping manufacturers commit to ex-post actions that support used machine prices. This, in turn, conveys higher pledgeability for
captive backed products, even for individual machines financed by banks. Although motivated as a rent seeking device, captive financing generates positive spillovers by relaxing
credit constraints.
I study the effect of human capital on firms' leverage decisions in a structural dynamic model.
Firms produce using physical capital and labor. They pay a cost per employee they hire, thus investing in human capital.
In default a portion of this human capital investment is lost. The loss of human capital constitutes a significant cost of financial distress.
Labor intensive firms are more heavily exposed to this cost and respond by using less leverage. Thus the model predicts a decreasing relationship between leverage and labor intensity.
Consistent with this prediction, I show in the data that high labor intensity leads to significantly less use of debt. In the model a move from the lowest to the highest decile of labor
intensity is accompanied by a drop in leverage of 21 percentage points, very close to the 27 percentage point drop in the data. Overall, I argue that human capital has an important effect
on firm leverage and should receive more attention from capital structure researchers.