Abstract: How do organizations adapt internally when ethnic divisions intensify? We develop a model in which organizations jointly choose managerial appointments and delegation when locally matched managers have better information but are less aligned with headquarters, and test it using a panel of Ethiopian bank branches. Exploiting variation in banks' exposure to ethnic conflict across their branch networks, we find that conflict increases the appointment of locally matched managers, while reducing lending autonomy and leaving branch credit mostly unaffected. Conflict-exposed branches are more likely to be staffed by insiders reassigned within the bank. An LLM-based CEO vignette exercise corroborates this mechanism.
Paper nr. 197
Title: FROM UNRATED TO RATED: HOW ESG RATINGS IMPACT THE DEBT PRICING OF LISTED FIRMS?
Authors: Andrea Bellucci, Alberto Citterio, Kambar Farooq, Rossella Locatelli, Andrea Uselli
Abstract: This paper investigates the causal effect of ESG rating initiation on corporate borrowing costs. Using a staggered difference-in-differences design, we analyze a panel of Italian publicly listed non-financial firms from 2013 to 2023. We find that becoming ESG-rated leads to a statistically and economically significant reduction in the firm?s cost of debt. On average, the cost of debt declines by approximately
90 basis points following ESG rating initiation. This effect strengthens over time indicating that the benefits of ESG certification in debt markets accumulate as lenders incorporate the ESG information. These findings hold up under a range of robustness tests including various matching strategies, alternative difference-indifferences estimators, placebo tests, and the use of different control groups.
Moreover, this relation is stronger for firms that are financially constrained, highly levered, and capital-intensive, as well as firms operating in low carbon industries. Overall, our results offer causal evidence that getting ESG-rated lead to lower cost of debt.
Paper nr. 196
Title: DEMAND SHOCKS IN EQUITY MARKETS AND FIRM RESPONSES
Authors: Fernando Broner, Juan J. Cortina, Sergio L. Schmukler, Tomas Williams
Abstract: This paper examines how shifts in investor demand influence firm financing and investment decisions. For identification, the paper exploits a large-scale MSCI methodo logical reform that mechanically redefined the stock weights in major international
equity benchmark indexes, changing the portfolio allocation of 2,508 firms across 49 countries. Because benchmark-tracking investors closely follow these indexes, the rebalancing constituted a clean shock to equity demand. The results show that portfolio
rebalancing by benchmark-tracking investors generated significant capital inflows and outflows at the firm level. Firms experiencing larger inflows increased equity issuance, even more so debt financing, and real investment. The paper complements the empirical
analysis with a simple model of firm financing in which a decline in the cost of equity increases the value of equity and relaxes borrowing constraints. Higher equity valuations allow firms to expand borrowing even without issuing substantial new equity, so debt
financing responds more strongly than equity issuance.
Paper nr. 195
Title: DEVELOPING THE MORTGAGE MARKET: TECHNOLOGY, PROPERTY RIGHTS, AND BANKING
Authors: Angelo D'Andrea, Patrick Hitayezu, Kangni Kpodar, Nicola Limodio, Andrea F. Presbitero
Abstract: Combining administrative data on credit, mortgages, and construction in Rwanda, this paper shows that technology helps overcome imperfections in property rights and foster the development of the mortgage market. Exploiting quasi-experimental variation in 3G internet coverage and a land title reform, we find that mobile connectivity shifts borrowers from microfinance to banks. 3G internet facilitates the distribution of land titles, which borrowers use as collateral for bank loans and mortgages, thus promoting household investment in real estate. A mediation analysis and structural estimation reveal that the property rights channel accounts for 30-37% of the effect of mobile internet on bank lending and 75-80% of the effect on collateralized loans.
Paper nr. 194
Title: ORGANIZATIONAL MONITORING COSTS AND LOAN CONTRACT STANDARDIZATION
Authors: Andrea Bellucci, Alexander Borisov, Alberto Zazzaro
Abstract: We empirically examine the relationship between monitoring costs within a banking organization and the standardization of credit terms in lending to small businesses. We find that when senior bank managers are away from a branch and monitoring of branch activity is more costly, loan officers at the branch exercise less discretion and standardize contract terms (collateral and credit amount) more. The relationship is also weaker in more competitive credit markets. Our results are consistent with the idea that costs of delegation within banking organizations affect their lending practices and external market discipline interacts with internal monitoring.
Paper nr. 193
Title: GREEN VERSUS CONVENTIONAL CORPORATE DEBT: FROM ISSUANCES TO EMISSIONS
Authors: Juan J. Cortina, Claudio Raddatz, Sergio L. Schmukler, Tomas Williams
Abstract: This paper investigates how firms use green versus conventional debt and the associated firm- and aggregate-level environmental consequences. Employing a dataset of 127,711 global bond and syndicated loan issuances by non-financial firms across 85 countries during 2012-23, the paper documents a sharp rise in green debt issuances relative to conventional issuances since 2018. This increase is particularly pronounced among large firms with high carbon dioxide emissions. Local projections difference-in-differences estimates show that, compared to conventional debt, green bond and loan issuances are systematically followed by sustained reductions in carbon intensity (emissions over income) of up to 50 percent. These reductions correspond to as much as 15 percent of
global annual emissions. Green bonds contribute to reducing emissions by providing financing to large, high-emitting firms, whose improvements in carbon intensity have significant aggregate consequences. Syndicated loans do so by channeling a larger volume of financing to a wider set of firms.
Paper nr. 192
Title: INELASTIC DEMAND MEETS OPTIMAL SUPPLY OF RISKY SOVEREIGN BONDS
Authors: Matias Moretti, Lorenzo Pandolfi, Sergio L. Schmukler, Germán Villegas-Bauer, Tomás Williams
Abstract: We study how investor demand influences government borrowing capacity, default risk, and bond prices. We develop a sovereign debt model with a rich demand structure, featuring investors with asset-allocation mandates. In our framework, bond prices depend not only on government policies and default risk, but also on investor composition and demand elasticity. We estimate this elasticity from bond price responses to the periodic rebalancing of a major emerging markets bond index, which shifts investors? allocations. We calibrate the model using this estimate and show that a downward-sloping demand acts as a disciplining device that mitigates debt dilution by curbing future issuance. This market-based mechanism lowers default risk and allows the government to sustain higher debt. Unlike
standard models, where discipline arises from default penalties, our mechanism operates through investor behavior. This distinction matters for policy: with market discipline in place, fiscal rules have milder effects on borrowing and default risk.
Paper nr. 191
Title: PRICE STABILITY AND FINANCIAL STABILITY: DESIGNING THE CENTRAL BANK MANDATE
Abstract: In this paper, we model a novel trade-off between price stability and financial stability in central banking. This trade-off arises from the interaction between the monetary policy interest rate, the central bank rescue interventions, and the degree of bank illiquidity. We characterize and compare the equilibrium outcomes, in terms of monetary policy, rescue policy, and bank investment decisions, that arise under a strict inflation-targeting mandate with those that instead emerge under a dual mandate, in which the central bank is required to account for both the costs of inflation and the costs associated with financial instability. Our analysis suggests that an inflation-targeting mandate may be advisable when the economy is subject to frequent and severe inflationary shocks that would require substantial policy rate adjustments, or when liquidity risks in the banking system are neither too high nor too low. Otherwise, a mandate that explicitly requires the central bank to take financial stability into account, even at the cost of relaxing strict inflation control, may be preferable.
Paper nr. 190
Title: SYSTEMIC BANKING CRISES IN COMPLEX ECONOMIES
Abstract: This paper provides an early warning exercise suggesting that in complex economies, characterized by the production of knowledge-intensive products, systemic banking crises are more frequent, even after considering standard predictors of crises. We relate our findings to standard contributions in development theory linking economic growth to structural transformation of the economy. In this perspective, we argue that while transitioning from a simple to a more complex productive structure can promote economic growth, it can also increase financial instability.
Paper nr. 189
Title: ARE GREEN FIRMS MORE FINANCIALLY CONSTRAINED? THE SENSITIVITY OF INVESTMENT TO CASH FLOW
Authors: Tommaso Oliviero, Sandro Rondinella, Alberto Zazzaro
Abstract: Green investment by private companies is essential to sustainable growth paths in advanced economies.
Whether, and to what extent, investments by green firms are hampered by lack of external finance is an open question. We estimate the sensitivity of investment to internal finance in firms engaging in green innovation, finding that the elasticity of investment to cash flow is four times less for green than for non-green firms. This result is stronger among smaller firms and robust to alternative definitions of ?green firms?. Our findings indicate that green firms are less financially constrained, consistent with the growing perception of the importance of the green transition, which potentially affects financial investors outside the company.
