1.    Purpose of the project and how it has developed during the project period

The purpose of this project was to study: 1: What impact credit market competition has on the firms’ mix of bank and market debt. 2. How local bankruptcy efficiency affects this mix. 3. How networks of competing banks, connected through the interbank market, can cause systemic risks even without assumptions of default by borrowers.
We have investigated all of the above research questions, first theoretically and thereafter empirically, which have resulted in two publications in prominent international journals, and one working paper.

2.    Implementation

Together with Bo Becker, Jens Josephson has written a paper about the factors that affect the debt mix of firms, comprising a theoretical and an empirical part. The empirical part uses micro data on the debt composition for large companies in 44 countries.

Together with Ethan Cohen-Cole and Eleonora Patacchini, Yves Zenou has written a theoretical paper about the relationship between credit market competition and financial stability. With the same co-authors, he has also written a paper that tests a theoretical model of financial network using data from the European inter-bank market.

We have presented the results of the papers at international conferences and seminars and have thereafter submitted them to prominent international journals for publication.


3.    The project’s three most important results and contributions to the international research front

Becker and Josephson have found empirical support for their theoretical predictions that small firms use bank loans, whereas firms above a certain critical size complements this financing by issuing bonds. This result is different from the previous literature which, with a pair of exceptions, predicts that firms either use bank or bond financing.

Becker and Josephson have also found empirical support for their hypothesis that more efficient bankruptcy procedures have a large impact on the development of a local bond market – in particular for firms with higher default probability. They have tested this hypothesis on a panel of firms from 44 countries and by studying the effect of bankruptcy reforms in different countries.

Zenou, Cohen-Cole and Patacchini have shown theoretically that the contagion on the interbank market may occur without defaults by any of the banks, both in a static and a dynamic setting. Based on the model, they have constructed a new measure of systemic risk. The measure estimates the aggregate liquidity cost as a financial institution reduces its lending.  

4.    New research questions generated through the project

Becker’s and Josephson’s results lead to the questions of how the (Swedish and European) insolvency procedures could be improved to benefit the development of a liquid bond market and how the welfare gains from such a market could be estimated.

Another questions generated by the project is the role that the US Chapter 11 bankruptcy procedure, which makes it possible for firms to continue their operation even after a default, plays in operational restructurings. Is such an institution necessary to achieve efficient bankruptcies also in Europe or is the Nordic system, with a bond trustee coordinating the bond holders, sufficient?

Given the results in Zenou, Cohen-Cole and Patacchini (2015), a natural question is how an optimal bank regulation should be designed in order to minimize the contagion on the inter-bank market.

The result for the network model assumes banks’ cost functions are decreasing in the number of links. It would also be of great interest to study what happens if this is not assumed.  

5.    The project’s international dimensions

Josephson has presented the results from the project at conferences in Stockholm and Madrid.

Becker moved from the USA to Sweden under 2013. He has presented his research related to the project at seminars in Stockholm, Exeter, Rotterdam, Madrid and Frankfurt, and conferences in Chile and Mexiko.

Zenou’s two co-authors are based in the USA. He has presented at seminars in London and Clermont Ferrand, and also participated in conferences and workshops in Paris, Barcelona, Rennes, Seattle and Washington.

6.    Dissemination of the results

We have primarily shared the results with the research community by publishing two articles in international journals with open access, and by making a working paper available on-line. In addition, we have presented the results at seminars in Stockholm, Exeter, Rotterdam, Madrid and Frankfurt, and conferences in Chile, Spain, Sweden, USA, France and Mexico.

Josephson has used funds from the grant to participate in the Barcelona GSE Summer Forum and The XXIII Spanish Finance Forum in Madrid. He has also presented the project at the IFN Stockholm Conference on Industrial Organization and Corporate Finance.

Zenou has used funds from the grant to participate in the following conferences and workshops: Network Dynamics and Public Goods in Paris, The III Workshop on Urban Economics in Barcelona, Summer School in Social Interactions and Urban Segregation in Rennes, The 15th Annual Public Economic Theory Conference in Washington och The 9th Meeting of the Urban Economics Association in Washington.

Becker has presented the findings of the project at The 5th International Universitad Católica Conference i Chile and The Second ITAM Finance Conference i Mexiko.

As an example of dissemination of the findings outside the research community, it should be mentioned that Bo Becker is a co-author of the SNS Economic Policy Council Report 2015 (Englund, P., Becker, B., Becker, T., Bos, M., & Wissén, P. (2015). SNS Economic Policy Council Report 2015. The Swedish Debt. SNS Förlag), where he has written a chapter to a large extent based on the results in Becker and Josephson (2016). The report has also been presented at an open seminar at SNS.

Becker has also, under auspices of SNS, organized a seminar on reforming the Swedish insolvency legislation, with presence of both lawyers and economists. At the seminar, the research by Becker and Josephson related to the project was discussed.