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The higher aggregate prevalence of loan over bond funding in Europe is not only driven by the well-documented differences in financial market settings but also strongly shaped by different firm characteristics. This paper shows that this debt choice depends foremost on firms‘ size and collateral availability. The European economy is much more fragmented than the U.S. economy, and thus features a different firm distribution. I estimate that if all European firms had access to a financial market like the U.S. market, their aggregate bond funding share would remain significantly smaller. This counterfactual suggests a limited potential for European corporate bond markets in the short and medium term.
9:30am - 10:00am
Once a Trader, Always a Trader: The role of traders in fund management
Gjergji Cici1, Philipp Schuster2, Franziska Weishaupt2
1University of Kansas, USA; 2University of Stuttgart, Germany
Discussant: Hannah Lucy Winterberg (IMF)
Mutual fund families are increasingly assigning traders to manage corporate bond mutual funds. Using this setting to study the role of traders in investment management, we document that trader managers identify and exploit short-term trading opportunities at lower transaction costs. These skills are particularly valuable during periods of market stress. Moreover, trader managers exhibit sophisticated risk management behavior: They reduce credit risk during periods of market stress and take more maturity risk during periods of large interest rate fluctuations, while holding portfolios with greater convexity. The combination of these skills produces relative outperformance during periods of large interest rate fluctuations.
10:00am - 10:30am
Covered but exposed: currency risk in collateralized bank funding
Valeriya Dinger1, Jin Cao2, Valentina Bruno3
1Universität Osnabrück, Germany; 2Norges Bank, Norway; 3American University, US
Discussant: Franziska Weishaupt (Universität Stuttgart)
In a market-based financial system, the interplay between banking and capital markets is profound. Using comprehensive credit registry data matched with bank- and firm-level information from a small open economy, we show that enhancing access to international capital markets amplifies the procyclicality of credit supply and increases its exposure to global financial conditions. Although access to international capital markets boosts liquidity, its positive effects on the real economy are modest or negligible.
