Adelina Barbalau

Research

Publications

“Cash Holdings and Access to External Finance: Evidence from the Bank Loan Market“, with Mark Huson and Lukas Roth, Review of Corporate Finance, 2022, 2, 65-97.

Using a large sample of bank loans obtained by U.S. firms, we examine the relation between cash holdings and access to external finance via bank loans. We document a negative relation between cash holdings and loan spreads. This negative relation is confirmed in a subsample of quasi-exogenous loan issuances associated with covenant violations and is stronger for higher risk and financially constrained firms. We also find that restrictions to aggregate credit supply have a smaller impact on the cost of funds at high-cash firms, and loans to high-cash firms have fewer restrictive covenants. All else equal, high-cash firms are less financially constrained not only because they have cash to draw down, but also because cash facilitates accessing external capital from banks.

Working Papers

 

“Reducing Carbon using Regulatory and Financial Market Tools“, with Franklin Allen and Federica Zeni

We study the conditions under which debt securities that make the cost of debt contingent on the issuer’s carbon emissions, similar to sustainability-linked loans and bonds, can be equivalent to a carbon tax. We propose a model in which standard and environmentally-oriented agents can adopt polluting and non-polluting technologies, with the latter being less profitable than the former. A carbon tax can correct the laissez-faire economy in which the polluting technology is adopted by standard agents, but requires sufficient political support. Carbon-contingent securities provide an alternative price incentive for standard agents to adopt the non-polluting technology, but require sufficient funds to fully substitute the regulatory tool. Absent political support for the tax, carbon-contingent securities can only improve welfare, but the same is not true when some support for a carbon tax exists. Understanding the conditions under which the regulatory and capital market tool are substitutes or complements within one economy is an important stepping stone in thinking about carbon pricing globally. It sheds light, for instance, on how developed economies can deploy finance to curb carbon emissions in developing economies where support for a carbon tax does not exist.

“The Optimal Design of Green Securities“, with Federica Zeni

We develop a model of green project financing which incorporates investors with green preferences into an otherwise standard framework of corporate financing with asymmetric information. Firms seek to finance green projects whose outcomes embed an uncertain component that is revealed only to the firm and which can be manipulated. Firms can raise funds using non-contingent green debt contracts, such as green bonds, that specify ex-ante the projects to be financed using the proceeds, but make no commitment to green outcomes. Alternatively, they can use outcome-based contingent contracts, such as sustainability-linked bonds, that do not impose restrictions on the use of proceeds but embed contingencies which incentivize commitment to outcomes. We demonstrate that the co-existence of the two green debt contracts is an equilibrium result when reported green outcomes are manipulable and firm types differ in their ability to manipulate. In the presence of asymmetric information about firms’ abilities to manipulate vs exert costly action, contingent debt is issued by low-type firms which seek to profit from manipulation, whereas non-contingent debt can be used as a costly signaling device. We provide empirical evidence consistent with these predictions.

“International Business and the Challenge of Financing a Just Climate Transition“, with Franklin Allen, Erik Chavez and Federica Zeni

Climate change and the associated issue of curbing carbon emissions has risen on the agenda of policymakers worldwide. However, global coordination on matters such as harmonized regulation has been subject to significant political frictions and the large inter-governmental transfers needed to finance the transition of developing economies have proven hard to come by. Recently, there have been considerable responses to climate change from the private sector, with stakeholders placing increasingly more pressure on firms, and financial markets mobilising increasingly more capital towards the reduction of negative externalities. We argue that although MNEs have been a big contributor to the problem, they can be an important part of the solution – they have unique features that enable them to play an important role in the fight against climate change. MNEs have extensive and efficient internal markets for governance, financing and technology, that enable them to circumvent country-specific frictions to climate action such as heterogeneous regulation, corruption, and the lack of technology. We analyse how different public and private incentive mechanisms could be designed to leverage MNEs’ unique features, realign their incentives with those of the collective and engage their potential to play a role in decarbonizing the economy. Lastly, we discuss challenges, opportunities and open research questions.

“Security Design: A Review“, with Franklin Allen

Security design, which broadly speaking deals with the issue of designing optimal contractual mechanisms for overcoming various frictions between agents, is the subject of an extensive literature. This paper presents a review of recent work on security design and is organized around the applications of security design in various fields of finance starting with classic corporate finance applications such as capital structure and corporate governance, financial intermediation applications such as securitization and contingent capital, the interaction of market and security design, as well as emerging applications such as fintech, sustainable finance and healthcare finance. Open research questions and promising research areas are also discussed.

“Information Choice and Shock Transmission“

The paper proposes an information-based theory of shock transmission which explains how the impact of a shock can decrease with exposure to it. I develop a model in which decision-makers learn about the risk factors they are exposed to, but have limited capacity to process information. I find that decision-makers optimally learn more about the risk factors they are more exposed to, which enables them to mitigate the direct impact of shocks by minimizing the loss due to suboptimal action. On the other hand, the impact of shocks to risk factors that they are relatively less exposed to is amplified through their poorly informed decision-making.

“Endogenously Ambiguous Information and Cautious Behavior”

This paper proposes a model in which costly information acquisition generates endogenous variation in information ambiguity and, as a consequence, in cautious behaviour. Specifically, the uncertainty regarding the interpretation of information increases endogenously upon the occurrence of highly unanticipated events. This causes ambiguity-averse agents to behave cautiously by reacting more strongly to bad news than to good news. However, in highly anticipated states of nature there is no uncertainty regarding the interpretation of information. Agents’ behaviour no longer exhibits cautiousness, and good and bad news affect conditional actions in a symmetric fashion. Thus, the model endogenizes ambiguity-averse behaviour (akin to agents paying a cost to change their preferences), and its predictions are in line with empirical evidence.

“Testing Inequality Restrictions in Multifactor Asset Pricing Models“, with Cesare Robotti and Jay Shanken

We develop an inequality constraints testing framework to assess the consistency of several multifactor models with the time-series and cross-sectional restrictions imposed by the intertemporal CAPM (ICAPM). Our tests of joint sign restrictions take into account the estimation error in the model parameters as well as the uncertainty arising from potential model misspecification. With a few exceptions, we cannot reject the null of consistency of the considered models with the ICAPM restrictions when using size and book-to-market, and size and momentum sorted portfolios as test assets. As argued by Fama (1991), the ICAPM may be a “fishing license” after all.