R Glen Donaldson

This thesis consists of three essays in empirical corporate finance. The first essay examines the role of supply-chain relationships in the pricing of loan contracts. I show that a firm’s borrowing costs are linked to the economic conditions of its customers but not its suppliers. Using external shocks to import competition, I find that tariff cuts in the borrower’s downstream industries increase the borrower’s loan spreads, while upstream tariff cuts do not. I show that downstream tariff cuts increase imports from foreign firms and decrease outputs for domestic firms in the downstream industries, and that this effect propagates up the supply chain to negatively impact the borrower. Borrowers exposed to downstream tariff cuts also experience lower sales growth and lower profits. The second essay examines the roles of domestic versus multinational firms in the transmission of monetary policy. I document that U.S.-headquartered multinationals increase investment more than domestically-focused U.S. firms do following a loosening of U.S. monetary policy. This effect is stronger for U.S. multinationals that operate in more foreign countries, have higher foreign sales, and have more years of experience operating abroad. The effects are the strongest for U.S. firms that operate in high-growth markets and when the U.S. economy is in a low growth phase. A decrease in the U.S. policy interest rate is also associated with an increase in foreign investment by U.S. multinationals. The third essay investigates the effect of bank-firm relationships on the supply and demand for funds and resulting loan terms. Important differences are found in how firm credit ratings, bank capital, and other factors shift supply and demand curves to determine loan terms between banks and firms that have relationships with each other versus those that do not. For example, the private information that banks and firms in a relationship share with each other reduces the effect of changes in firm credit ratings, leverage and other factors. It is also shown that monetary policy is transmitted more strongly through non-relationship lending than through relationship lending. These effects begin immediately upon the formation of a bank-firm relationship and strengthen as the relationship intensifies.

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This thesis is a collection of three essays in Real Estate Finance. The first essay examines the determinants of commercial mortgage contract terms. A cornerstone of finance theory is that risk and return should be positively related. However, existing empirical studies often find a negative relationship between interest rates and risk terms in mortgage contracts. Previous studies have found such results puzzling, and have surmised that they may arise because traditional models do not explicitly account for the simultaneous determination of interest rates and loan terms. We therefore specify separate supply and demand equations for loanable funds, and then examine mortgage contracts as equilibrium outcomes of a multidimensional negotiation between borrower and lender. Our empirical results reveal that borrowers and lenders individually require higher returns for greater risk, as theory requires, but that this can produce apparently negative risk/return correlations in contract outcomes, as observed in the data. We demonstrate how various risk factors impact the simultaneous determination of equilibrium interest rates and loan terms.The second essay investigates adverse selection in the Home Equity Conversion Mortgages ("HECMs"). The pricing structure used by the Federal Housing Administration ("FHA") does not reflect geographic or cyclical risk. Since HECM's were disproportionately originated in the sand states in the lead up to the 2008 financial crises, the majority of the loans originated between 2005- 2007 were underwater. We ask whether borrowers adversely selected into HECM’s with the intent to exploit mispriced insurance? This appears unlikely: borrowers whose loans terminated with credit limits greater than their homes are worth have been no likelier to exhaust credit than similar borrowers whose loans terminated with credit limits below collateral value.The third essay studies the effect on residential property prices arising from proximity to oil pipelines. The key contributions of the paper are to show that [1] the disamenity effects related to pipeline proximity are highly localized over very short distances [2] the magnitude of the effects are sensitive to the land use of the pipeline easement. Our findings suggest a likely specification bias in studies that use parametric measures of proximity to an environmental hazard.The second essay investigates adverse selection in the Home Equity Conversion Mortgages ("HECMs"). The pricing structure used by the Federal Housing Administration ("FHA") does not reflect geographic or cyclical risk. Since HECM's were disproportionately originated in the sand states in the lead up to the 2008 financial crises, the majority of the loans originated between 2005- 2007 were underwater. We ask whether borrowers adversely selected into HECM’s with the intent to exploit mispriced insurance? This appears unlikely: borrowers whose loans terminated with credit limits greater than their homes are worth have been no likelier to exhaust credit than similar borrowers whose loans terminated with credit limits below collateral value.The third essay studies the effect on residential property prices arising from proximity to oil pipelines. The key contributions of the paper are to show that [1] the disamenity effects related to pipeline proximity are highly localized over very short distances [2] the magnitude of the effects are sensitive to the land use of the pipeline easement. Our findings suggest a likely specification bias in studies that use parametric measures of proximity to an environmental hazard.

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