Mats Levander

ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE

Mats Levander

ESSAYS ON

HO

USEH

OLD

AN

D CO

RPORA

TE FINA

NCE

ISBN 978-91-7731-095-2

DOCTORAL DISSERTATION IN FINANCE STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018

Mats Levander

ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE

Mats Levander

ESSAYS ON

HO

USEH

OLD

AN

D CO

RPORA

TE FINA

NCE

ISBN 978-91-7731-095-2

DOCTORAL DISSERTATION IN FINANCE STOCKHOLM SCHOOL OF ECONOMICS, SWEDEN 2018

Essays on Household and Corporate Finance

Mats Levander

Akademisk avhandling

som för avläggande av ekonomie doktorsexamen vid Handelshögskolan i Stockholm framläggs för offentlig granskning

torsdagen den 4 oktober 2018, kl 15.15, Swedish House of Finance,

Drottninggatan 98, Stockholm

ESSAYS ON HOUSEHOLD AND CORPORATEFINANCE

Essays on Household and CorporateFinance

Mats Levander

Dissertation for the Degree of Doctor of Philosophy, Ph.D.,in FinanceStockholm School of Economics, 2018

Essays on Household and Corporate Financec© SSE and Mats Levander, 2018

Front cover illustration:c© Sergii Mogyla/Shutterstock.com, 2018

ISBN 978-91-7731-095-2 (printed)ISBN 978-91-7731-096-9 (pdf)

This book was typeset by the author using LATEX.

Printed by:BrandFactory, Goteborg, 2018

Keywords:Household finance, financial buffer, mass layoff, unemployment, corporatefinance, financial crisis, firm investment, business group, internal capitalmarkets, external financing constraints, financial distress.

iii

To my father

Foreword

This volume is the result of a research project carried out at the Departmentof Finance at the Stockholm School of Economics (SSE).

This volume is submitted as a doctoral thesis at SSE. In keeping withthe policies of SSE, the author has been entirely free to conduct and presenthis research in the manner of his choosing as an expression of his own ideas.

SSE is grateful for the financial support provided by VINNOVA andthe Jan Wallander och Tom Hedelius stiftelse which has made it possibleto carry out the project.

Goran Lindqvist Magnus DahlquistDirector of Research Peter Wallenberg Professor of Finance

Stockholm School of Economics Head of Department of FinanceStockholm School of Economics

Acknowledgements

First, I am eternally grateful to my supervisor Mariassunta Giannetti forher patience and support and invaluable advice. I could always rely onher economic intuition and experience. I would also like to extend mygratitude to other faculty members of the Department of Finance whocontributed substantially during this thesis, in particular I would like tothank Mike Burkhart, Cristina Cella, Dong Yan, Laurent Bach, RaminBaghai and Paolo Sodini. I am also appreciative to the administrative staffof the department, in particular Anneli Sandbladh and Jenny WahlbergAndersson who always provided excellent help.

Second, I am also very grateful to everyone involved in making myresearch visit to Indiana University, Kelley School of Business, unforget-table. I thank my sponsor Andrew Ellul for providing helpful commentsand suggestions for my research projects and also helping me settling inin Bloomington. I am also indebted to Greg Udell, Matt Billett, KristophKleiner, Isaac Hacamo and Burcu Esmer. I thank the Jan Wallander ochTom Hedelius stiftelse for making my visit possible.

Third, I thank my current co-authors and friends, Marieke Bos and Erikvon Schedvin, without whom this thesis would never have been written.

Fourth, I would like to thank my colleagues at the Research Division atSveriges riksbank. In particular my office mate and friend Matias Quiroz.We shared the joys and the frustrations during our studies through ouridentical sense of humor. I would like to thank Kasper Roszbach, who,apart from discussing and commenting on my projects, encouraged me toapply for a VINNOVA grant to pursue a Ph.D.. I also thank Tor Jacobsonand Jesper Linde who made arrangements so that I could be a part of theResearch division at Sveriges riksbank during my studies. I am also in-debted to Thomas Jansson, Karl Walentin, Tor Jacobson, Mikael Carlssonand Peter van Santen for always finding the time to answer my countless

viii ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE

questions.Fifth, I would like to thank my fellow PhD students. In particular, I

thank Valeri Sokolovski, Tommy von Bromsen, Henrik Petri, Jieying Li,Fatemeh Hosseini, Mariana Khapko, Tomas Thornqvist, Viktor Thell andYingjie Qi.

Sixth, I would like to thank my family. My father Anders, who tragi-cally passed away during the course of this thesis, my mother, Elisabeth,and my brother Erik. I also thank my daughters Julia and Matilda foralways making me smile and laugh. Last, but not least, I would like tothank my fantastic partner, Johanna, for her understanding, support andlove during the course of this thesis.

Stockholm, August 24, 2018

Mats Levander

Introduction

This doctoral thesis consists of three independent papers in empirical house-hold and corporate finance. Each chapter is self-contained and may be readindependently.

In the first paper, Financial Buffers, Unemployment Duration and Re-placement Income, I empirically examine how the financial buffer of un-employed individuals affects the duration of their unemployment spell andtheir replacement labor income after they have found a new position, re-spectively. The analysis is conducted on a very detailed Swedish dataset,which provides a complete picture of households balance sheets. As unem-ployment spells may not be exogenous events (e.g., a worker can anticipateunemployment, plan to become unemployed, or be fired for unobservedreasons), I focus on individuals who are affected by mass layoffs. Suchevents are generally considered to be exogenous with respect to individualcharacteristics. Nevertheless, a household’s balance-sheet position at thetime of the layoff event may not be exogenous. To alleviate endogeneityissues, I measure the households’ financial buffer in the years prior to thelayoff event year.

I find that both liquid financial wealth and net wealth have a positiveeffect on both unemployment duration and replacement income, consistentwith that individuals with larger financial buffers are able to search morethoroughly for a new position and find a better match for their humancapital compared to individuals with smaller or no financial buffer. Giventhe positive effects due to both financial wealth and net wealth, I split netwealth into financial wealth and home equity to disentangle their separateimpacts. The results suggest that financial wealth is the key driver of thebaseline results, which is plausible given that financial wealth is the morereadily available one of the two buffers. I also find interesting cross-sectionaleffects e.g., the impact of the financial buffer differs across educational lev-

x ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE

els. Having a financial buffer has a statistically significant positive effecton both duration and replacement labor income for low-educated work-ers (education below university level), while I find no significant effect forhigh-educated workers (university education and above). Finally, I doc-ument that households characterized by individuals with unemploymentdurations greater than zero decrease their financial wealth buffers duringtheir unemployment spells.

In the second paper, Diversification Advantages During the Global Fi-nancial Crisis, I investigate whether being part of a business group miti-gated the impact of the global financial crisis on the investments of limitedliability firms in Sweden. The global financial crisis is used as an exoge-nous shock to firms’ abilities to raise external financing. I find that busi-ness group affiliation had a mitigating effect on the impact of the crisis onfirm investments. Standalone firms reduced their investments by 33% onaverage, while business group firms reduced their investments by 14% onaverage. The difference is substantial and highlights the benefits of businessgroup affiliation for small and medium-sized, private and bank dependentfirms who constitute the lion share of firms in Sweden. These findings aredriven by diversification effects among business group firms due to busi-ness group firms’ easier access to external financing and use of internalcapital markets. The internal capital markets effects are only present fordiversified business groups that operate in multiple industries, consistentwith a diversification effect. Finally, I also document that business groupfirms’ profitability increased relative to standalone firms after the crisis,suggesting that they used their advantage to invest efficiently.

The third paper, Relative Income, Indebtedness and Defaults, is co-authored with Marieke Bos and Erik von Schedvin. Using Swedish paneldata on individual borrowing characteristics and neighborhood incomes, weassess the impact of shifts in relative income on indebtedness and paymentdelinquencies. We find that a worsening in relative income vis-a-vis simi-larly aged neighbors leads to higher indebtedness, primarily due to shiftsin consumption debt. This relationship is not accompanied by a rise inloan delinquencies. However, we document over-indebtedness and finan-cial distress for certain demographic sub-groups that are presumably moreresponsive towards peer influence (e.g., younger individuals).

We also explore a sequence of tax reforms that led to plausibly exoge-

xi

nous increases in disposable income for neighborhood peers in the upperpart of the income distribution. Among the group that did not enjoy thetax cuts, we find relative larger adjustments in indebtedness for individualsliving in neighborhoods where a larger share of their peers enjoyed tax cuts.The effect is primarily observed for individuals with incomes just below theincomes of those who received the tax cuts, while we find no effects for indi-viduals with lower incomes. This result is consistent with the presumptionthat individuals are more responsive to consumption changes displayed byneighbors with similar consumption patterns. When exploring the under-lying source of the adjustment, we find that the effect is the outcome ofadjustments in consumption debt.

The remainder of this dissertation consists of the three papers intro-duced above.

Contents

1 Financial Buffers, Unemployment Duration and Replace-ment Labor Income 11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 Financial Buffers and Job Searches . . . . . . . . . . . . . . 71.3 Data and Institutional Setting . . . . . . . . . . . . . . . . . 8

1.3.1 Unemployment Benefits . . . . . . . . . . . . . . . . 91.3.2 Mass layoff . . . . . . . . . . . . . . . . . . . . . . . 91.3.3 Unemployment duration . . . . . . . . . . . . . . . . 10

1.4 Sample . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.5 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . 111.6 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . 13

1.6.1 Unemployment Duration . . . . . . . . . . . . . . . . 131.6.2 Replacement Labor Income . . . . . . . . . . . . . . 151.6.3 Financial Wealth and Home Equity . . . . . . . . . . 181.6.4 Heterogeneity . . . . . . . . . . . . . . . . . . . . . . 191.6.5 Reverse Causality . . . . . . . . . . . . . . . . . . . . 221.6.6 Use of Financial Buffers . . . . . . . . . . . . . . . . 23

1.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241.8 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . 251.9 Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281.10 Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291.11 Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

2 Diversification Advantages During the Global Financial Cri-sis 472.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 482.2 The Global Financial Crisis in Sweden . . . . . . . . . . . . 54

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xiv ESSAYS ON HOUSEHOLD AND CORPORATE FINANCE

2.3 Diversification Advantages . . . . . . . . . . . . . . . . . . . 552.4 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

2.4.1 Databases . . . . . . . . . . . . . . . . . . . . . . . . 562.4.2 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 572.4.3 Sample Construction . . . . . . . . . . . . . . . . . . 57

2.5 Empirical Strategy . . . . . . . . . . . . . . . . . . . . . . . 582.5.1 Firms’ Investments . . . . . . . . . . . . . . . . . . . 582.5.2 Test of Access to External Financing . . . . . . . . . 592.5.3 Test of Internal Capital Markets . . . . . . . . . . . . 59

2.6 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . 612.6.1 Summary Statistics . . . . . . . . . . . . . . . . . . . 612.6.2 Test of Difference in Means . . . . . . . . . . . . . . 612.6.3 Firms’ Investments . . . . . . . . . . . . . . . . . . . 622.6.4 The Ability of Group Firms to Raise External Capital 672.6.5 Internal Capital Markets . . . . . . . . . . . . . . . . 672.6.6 Efficient Allocation of Capital . . . . . . . . . . . . . 71

2.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722.8 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . 742.9 Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782.10 Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

3 Relative Income, Indebtedness and Defaults: An EmpiricalCharacterization 953.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . 963.2 Measuring Consumption Externalities . . . . . . . . . . . . . 100

3.2.1 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 1003.2.2 Descriptive statistics . . . . . . . . . . . . . . . . . . 1013.2.3 Empirical Strategy . . . . . . . . . . . . . . . . . . . 102

3.3 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . 1073.3.1 The association between indebtedness and the in-

come of neighborhood peers . . . . . . . . . . . . . . 1073.3.2 Difference-in-differences results . . . . . . . . . . . . 112

3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1153.5 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . 1173.6 Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1203.7 Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125