This thesis addresses various contractual solutions to firms' financial distress. The first chapter presents a unified framework for analyzing the holdout problem, a pervasive economic phenomenon in which value creation is hindered by the incentive to free-ride on other agents' participation. The framework nests many classic applications, such as takeovers and debt restructuring, and highlights the role of the commitment power: The holdout problem can be resolved using contingent contracts with commitment, e.g., by a unanimity rule if the principal can commit to calling off the deal when anyone holds out. In contrast, a lack of commitment substantially alters the optimal offers depending on the payoff sensitivities of the existing contracts, which explains the absence of the unanimity rule despite its efficacy and cross-sectional heterogeneity in offers. (E.g., senior debt is used in debt restructuring but not in takeovers.) Furthermore, I show that stronger partial commitment can backfire via renegotiation, exacerbating the holdout problem. This non-monotonicity reconciles contradictory empirical findings on the use of CACs in the sovereign debt market and sheds light on various policies. Lastly, the paper shows stronger investor protection could facilitate instead of hinder restructuring under limited commitment.The second chapter considers the role of institutions in financial distress. Distress can be mitigated by filing for bankruptcy (which is costly) or preempted by restructuring (which is impeded by a collective action problem). We find that bankruptcy and restructuring are complements, not substitutes: Reducing bankruptcy costs facilitates restructuring rather than crowding it out. So does making bankruptcy more debtor-friendly, under a condition that can be written in terms of a few easily observable sufficient statistics. The model gives new perspectives on relief policies (e.g., subsidies to bankrupt firms) and on legal debates (e.g., the absolute priority rule). The third chapter examines the optimal design of liquidity insurance contracts for firms that experience a quality shock concurrent with the liquidity shock, both of which cannot be verified and hence contracted upon. Due to the incompleteness of these contracts, firms cannot receive full liquidity insurance: If a firm is fully insured, it has little incentive to stop inefficient projects, as creditors bear the costs. Therefore, the optimal contract involves limited insurance and requires co-investment with internal cash. Interestingly, my findings challenge the classical theory that low-pledgeability firms rely more on liquidity insurance. Instead, I show that a lack of pledgeability prevents these firms from obtaining more liquidity insurance. In fact, I demonstrate a positive relationship between liquidity insurance and pledgeability, which sheds light on the seemingly paradoxical fact that smaller firms that need liquidity insurance the most are the least insured and face the highest risk of revocation. Furthermore, my results rationalize the common cash-related covenants in credit lines.

This dissertation is concerned with international financial crisis response and the role that formal and informal international institutions play in this process. It is about understanding the potential of and limits to international crisis governance. It tries to answer three interrelated questions. First, what are the mechanics of international crisis lending? Second, what role can international institutions play in effectively distributing information so that policy responses can be optimized? Finally, what crisis governance structures are best suited to economic and political circumstances of the global financial system? In order to address these questions this dissertation uses a combination of formal (game theory) and informal theory building. It then examines these theoretical arguments using an empirical analysis based on historical survey of crisis response since the late nineteenth century and a comparative case study of crisis management during the Great Depression (1930-31) and the Asian Financial Crisis (1997-98). With regard to the first question, it argues that crisis lending is not simply shaped by the interaction of crisis lenders and borrowers. Ultimately, the terms of a crisis loan are negotiated in a space whose limits are determined by two additional actors: international investors/speculators and domestic political opposition. With regard to the second, it argues that both formal and informal international institutions play an important role in disseminating information and thus policy adaptation and change. However, there are clear limits to what institutions can do. In practice, this means that the goal of creating a crisis-free system is impossible. Finally, with regard to the broad question of crisis governance, it argues that the most effective financial governance system is one build around a partnership between a concert of key financial powers and an international financial institution dedicated to maintaining stability in the financial system.

The purpose of this study is to develop an indebtedness framework that explains the effects of financialisation and household indebtedness on economic development. For this purpose, the study empirically examines annual South African data covering the years 1990-2017 to look at the effect of financialisation before and after the 2007/08 financial crisis. South Africa adopted an inflation targeting monetary policy regime in the 1990s before the global economic crisis in response to the global financial crisis of 2007-08. Examining data from 1990-2017 made it possible to look at the effects of financial deregulation policies that were introduced post the 2007-08 financial meltdown. The study addressed three objectives. The first objective sought to establish the extent of financialisation in the South African economy pre and post the 2008 financial crisis. To achieve this objective, annual time series data from 1990-2017 on financialisation variables was split into two, before and after the financial crisis. Graphical presentations of the four financialisation variables (financial deregulation, foreign financial inflows, asset price volatility, and shift to market-based finance) showed that there was a difference in financialisation before and after the 2008 financial crisis. Analysis of variance showed that there is a statistically significant difference between the foreign financial inflows’ series before and after the financial meltdown of 2008 (t-test value -6.527, p ≤ 0.0001). (1990-2008). The findings also showed that there was no statistically significant difference between asset price volatility before and after the financial meltdown of 2008. Interestingly, there is a statistically significant difference between stock market value traded in the period from 1990-2008 and 20092017 after the financial crisis (t = -4.295, p ≤0.001). The second objective sought to examine the causal direction between financialisation and household indebtedness. Contrary to a priori expectations, the findings showed that financial deregulation, foreign financial inflows and shift to market-based finance do not Granger cause indebtedness. However, the findings showed that the null hypothesis that asset price does not Granger cause household indebtedness was rejected. This implies that there is a causal direction between asset price volatility and household indebtedness Lastly, the third objective of this study was to explain the effects of financialisation and indebtedness on economic development to inform the indebtedness framework that this study set out to develop. Using annual data for the period of 1990 to 2017, the third objective was addressed by examining the effect of household indebtedness and financialisation on economic development. These effects were tested using OLS regression and error correction modelling technique (ECM) for each of the four financialisation variable: (1) financial deregulation measured using the financial reform index; (2) foreign financial inflows measured using stock of foreign liabilities as percentage of GDP; (3) asset price volatility; and (4) shift to market-based finance, measured using stock market value traded as percentage of GDP. The findings showed that foreign financial inflows and asset price index when regressed with household indebtedness showed a statistically significant effect on economic development in a long-run model. The indebtedness framework was duly presented showing that economic development is likely to be negatively and strongly affected by financialisation as experienced in asset price volatility and foreign financial inflows. / Graduate School of Business Leadership / D.B.L.

This dissertation presents three essays in financial economics. In the first chapter, Bankruptcy Lawyers and Credit Recovery, I study how bankruptcy law firm advertisements affect credit recovery of households in financial distress. Exploiting the border discontinuity strategy associated with the geographic unit in which local TV advertisements are sold, I empirically uncover bankruptcy filings and credit recovery related to exogenous variations in bankruptcy law firm advertisements. I first document a significant advertising effect on filing rates and show that advertising-induced filers are similar to existing filers. I then find a positive effect of advertisements on credit outcomes including credit score, new homeownership, and foreclosure. I interpret these findings as evidence that lawyers address information frictions in households' assessment of the bankruptcy option. In the second chapter, Cross-subsidization of Bad Credit in a Lending Crisis, we study the corporate-loan pricing decisions of a major, systemic bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the actual interest rate and the ``breakeven rate'' (BE rate) of each loan, as computed by the bank's own loan-pricing department (in effect, the loan's marginal cost). We document that low-BE-rate (safer) borrowers are charged significant markups, whereas high-BE-rate (riskier) borrowers are charged smaller and even negative markups. We rationalize this de facto cross-subsidization through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing. In the third chapter, Who Provides Credit in Times of Crisis? Evidence from the Auto Loan Market, we explore lending from traditional banks, credit unions, and finance companies (nonbanks) in the auto loan market over the past two decades with emphasis on the Great Recession and the COVID-19 pandemic. We find that banks provided weak support during the pandemic, thus losing market share and continuing a trend that emerged following the Great Recession. Nonbank market share during this period grew most significantly for subprime borrowers and in counties with stronger bank dependence. We present evidence consistent with a supply-side interpretation of this bank market share loss. These findings contrast with the experience during the Great Recession, when banks contributed the most resilient credit to the auto loan market. Our paper highlights nonbanks’ critical role in the auto loan market in times of crisis, particularly for the subprime segment.