Research

Trade Credit under a Pro-Creditor Bankruptcy Regime

Trade credit provides customers the flexibility to procure goods from their suppliers without immediate cash payment, serving as a fundamental form of short-term financing. If suppliers are granted increased legal protection, but financial creditors gain greater protections in bankruptcy, does the availability of trade credit increase or decrease? This is an important consideration since an increase in the rights of both groups of creditors can influence the lending behavior (supply) of suppliers and also the borrowing behavior (demand) of debtors. Leveraging a recent bankruptcy reform in India which strengthened creditor rights, I find an increase in trade credit usage of firms closer to default. Furthermore, these firms do not experience a corresponding drop in profitability or bank borrowing indicating a supply driven increase in trade credit. These findings suggest that strengthening creditor rights increases the willingness of suppliers to extend more trade credit, thereby aiding the sustenance of distressed firms.

The Macroeconomic Consequences of Government Spending (Re)Allocation
with Neville Francis and Michael T. Owyang

In this paper, we investigate whether changes in the composition of government purchases affect macroeconomic outcomes. To achieve this, we utilize a Factor-augmented Vector Autoregression (FAVAR) model across six spending categories, aiming to estimate the slope and curvature factors that represent the distribution of fiscal spending. We focus primarily on the slope factor, referred to as the reallocation factor, which captures shifts in spending proportions among categories. Our findings suggest that reallocating funds from state and local government consumption to other fiscal components leads to an increase in total federal outlays and output, all without worsening the fiscal deficit. These results highlight the importance of spending composition in influencing fiscal policy outcomes.

This vs. That: The Economic Effects of Fiscal Spending Shifts (Full Draft available on Request)
with Neville Francis and Michael T. Owyang

In this paper, we investigate how redistributing government spending across different spending categories influences the economy. An exogenous increase in spending on a component results in a change in total spending and also a shift in the distribution of spending. Our VAR model decomposes this composite shock into a level shock and a reallocation shock. This allows us to estimate the macroeconomic implications of redistributing spending between two components without a corresponding increase in total spending. We find that a reallocation towards government investment from government consumption increases output and private investment. Conversely, a shift in spending towards military expenditures crowds out private investment. Additionally, a higher share of state and local government purchases is beneficial in the short-term.

Downstream Effects of Private Equity during Crisis (Data analysis stage)

During the 2008 financial crisis, Private Equity (PE)-backed companies saw greater inflows of both equity and debt (Bernstein et al., 2018). According to the redistribution hypothesis of trade credit, cash-rich firms extend credit to their liquidity-constrained customers. Utilizing data extracted from Capital IQ on PE deals active prior to the financial downturn, combined with financial information from Orbis, preliminary analyses suggest that while PE-backed firms saw a marked rise in inflows from their PE partners, their accounts receivable did not change significantly when compared to non-PE-backed firms. This indicates that the additional liquidity is not shared with their downstream customers. Instead, this additional capital appears to have been directed toward investment. The investment increased by approximately 10% for PE-backed firms relative to their non-PE counterparts.