More from these Authors

• Article | Brookings Papers on Economic Activity | Fall 2020

  Sizing Up Corporate Restructuring in the COVID Crisis

  Robin Greenwood, Benjamin Iverson and David Thesmar

  In the wake of the COVID-19 pandemic, the financial and legal system will need to deal with a surge of financial distress in the business sector. Some firms will be able to survive, while others will face bankruptcy and thus need to be liquidated or reorganized. Many surviving firms will need to be downsized or acquired. In normal times, this triage is supported by the court system, banks, and financial markets. The goal of this paper is to size up the coming surge of financial distress, list the challenges it presents in the current environment, and offer potential policy solutions. Overall, our analysis suggests that the two key issues will be court congestion and excess liquidation and failure of small firms.

  Keywords: COVID-19; Health Pandemics; Economy; System Shocks; Financial Crisis; Restructuring;

  Citation:

  Greenwood, Robin, Benjamin Iverson, and David Thesmar. "Sizing Up Corporate Restructuring in the COVID Crisis." Brookings Papers on Economic Activity (Fall 2020).  View Details

  CiteView Details Read Now

  Related

• Article | Journal of Financial and Quantitative Analysis | August 2020

  Leverage and the Beta Anomaly

  Malcolm Baker, Mathias F. Hoeyer and Jeffrey Wurgler

  The well-known weak empirical relationship between beta risk and the cost of equity—the beta anomaly—generates a simple tradeoff theory: As firms lever up, the overall cost of capital falls as leverage increases equity beta, but as debt becomes riskier the marginal benefit of increasing equity beta declines. As a simple theoretical framework predicts, we find that leverage is inversely related to asset beta, including upside asset beta, which is hard to explain by the traditional leverage tradeoff with financial distress that emphasizes downside risk. The results are robust to a variety of specification choices and control variables.

  Keywords: risk anomaly; leverage; Capital Structure; Risk and Uncertainty;

  Citation:

  Baker, Malcolm, Mathias F. Hoeyer, and Jeffrey Wurgler. "Leverage and the Beta Anomaly." Journal of Financial and Quantitative Analysis 55, no. 5 (August 2020): 1491–1514.  View Details

  CiteView DetailsFind at Harvard Read Now

  Related

• Working Paper | HBS Working Paper Series | 2020

  Predictable Financial Crises

  Robin Greenwood, Samuel G. Hanson, Andrei Shleifer and Jakob Ahm Sørensen

  Using historical data on post-war financial crises around the world, we show that crises are substantially predictable. The combination of rapid credit and asset price growth over the prior three years, whether in the nonfinancial business or the household sector, is associated with about a 40% probability of entering a financial crisis within the next three years. This compares with a roughly 7% probability in normal times, when neither credit nor asset price growth has been elevated. Our evidence cuts against the view that financial crises are unpredictable “bolts from the sky” and points toward the Kindleberger-Minsky view that crises are the byproduct of predictable, boom-bust credit cycles. The predictability we document favors macro-financial policies that “lean against the wind” of credit market booms.

  Keywords: Financial Crisis; Forecasting and Prediction; Mathematical Methods;

  Citation:

  Greenwood, Robin, Samuel G. Hanson, Andrei Shleifer, and Jakob Ahm Sørensen. "Predictable Financial Crises." Harvard Business School Working Paper, No. 20-130, June 2020.  View Details

  CiteView Details Read Now

  Related