The Debt Market Role of Asset Valuation Uncertainty

Lending Relationships Along Ownership Lines: Institutional Cross‐Ownership and Bank Loan Contracts

We find that banking relationships built through institutional cross‐ownership influence the granting of loans as well as loan contract terms. Firms that are newly added to institutional cross‐owners' portfolios are more likely to borrow from banks that previously issued loans to other firms within the same portfolio. These related banks charge lower loan interest spreads and offer greater loan amounts than other banks issuing loans to the same borrower. However, such loans also are more likely to include capital covenants in the presence of high shareholder–debtholder conflicts. Thus, lenders appear to value the benefits of common institutional ownership while still protecting themselves against potential risk shifting. The interest spread effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial distress risk, and dedicated institutional common owners. These results are consistent with either direct information flows or indirect signaling effects and are robust to different fixed effects specifications as well as to an identification strategy that exploits common ownership stemming from financial institution mergers. Overall, our study provides evidence that investor networks play a beneficial role in the production and dissemination of contracting‐relevant information and highlights cross‐ownership as a favorable determinant for contracting efficiency beyond traditional accounting measures.

Benefits of Bank-Collateralized Loan Obligation Relationships: Evidence from Bankruptcy and Restructuring Outcomes of Collateralized Loan Obligation-Held Loans

Despite persistent academic and regulatory concerns, collateralized loan obligations (CLOs) have consistently demonstrated resiliency over the past two decades. We document that firms whose loans are acquired by CLOs are less likely to experience adverse credit events within 12 months of inclusion in the CLO portfolio, particularly when CLOs maintain institutional-level relationships with originating banks (through repeated transactions) or when individual-level relationships exist (as evidenced by personnel flows between originating banks and CLOs). The effects of these relationships are more pronounced when banks likely possess superior private information about borrowers. Furthermore, conditional upon filing for bankruptcy, borrowers whose loans are held by CLOs with institutional- or individual-level relationships are more likely to successfully reorganize under Chapter 11. Collectively, our findings highlight the dual information channels, both institutional and personnel based, that mitigate information frictions in the leveraged loan market. Data Availability: Data are available from commercial sources cited in the text. JEL Classifications: M41; G32; G34; G12.

Information Asymmetry at Debt Rollover and Startup Loans

This paper investigates the optimal design of information disclosure at debt rollover to maximize an entrepreneur’s ex ante borrowing capacity and social welfare. We develop a model where an entrepreneur secures a startup loan for project experimentation and must refinance for production. Borrowing capacity is limited by the pledgeability of project cash flows, which is eroded by three interacting forces: the entrepreneur’s moral hazard, premature liquidation risk following a liquidity shock, and rent dissipation arising from creditor competition. We show that a coarse “pass-or-fail” signal structure maximizes borrowing capacity. This binary structure is informative to balance incentive provision against liquidation risk, yet sufficiently coarse to mitigate rent dissipation. Furthermore, we demonstrate that the welfare-maximizing signal structure remains a pass-or-fail form, with an optimal threshold that tightens as the entrepreneur’s borrowing need increases. This paper was accepted by Lin William Cong, finance. Funding: H. Xu acknowledges support from the National Social Science Fund of China [Project Code: 23BJY251]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2024.07999 .

The capital constraints channel of collateral eligibility: evidence from a credit support exit policy

Interest Rate Risk, Bank Stability, and Valuation

This article surveys recent theoretical and empirical advancements on the impact of interest rates on bank valuations and stability—two crucial concerns for financial researchers, policy makers, and regulators. We begin by highlighting the distinctive feature of the regional banking crisis of 2023—the prevalence of liquid assets on bank balance sheets—in contrast to earlier crises such as the savings and loan crisis of the 1980s and 1990s, where illiquid assets contributed to banking failure. In Section 2, we present a theoretical framework that integrates both asset illiquidity and the risk of self-fulfilling solvency runs on the deposit franchise. We show the conditions under which the deposit franchise fails to hedge asset declines due to rising interest rates and demonstrate how and why this amplifies bank fragility. Sections 3–5 explore empirical methods for assessing these effects. We review approaches to measuring the interest rate sensitivity of bank asset values, highlighting their limitations. We also examine recent advances in quantifying bank fragility, particularly the challenges of valuing the deposit franchise under both stable conditions and crisis scenarios. Additionally, we discuss new measures of bank fragility that capture the potential endogenous collapse of franchise value during crises. Applying these measures leads us to conclude that US banks face significant unhedged interest rate exposure in their asset portfolios. When combined with their high leverage, this exposure substantially increases the risk of solvency runs. Liquidity interventions, while useful in the short term, are insufficient for addressing the systemic risks posed by this vulnerability.

Corporate Debt as a Put Option: A Structural Credit Risk Framework for Banks Under Dynamic Refinancing Risk

This paper extends the classical Merton structural credit risk model by incorporating dynamic refinancing risk into the measurement of bank default risk. The study addresses a key limitation of traditional structural models, which treat default as a function of asset values relative to liabilities but abstract from debt maturity structure and rollover conditions. The proposed framework integrates an issuance-based refinancing ladder, a market-consistent funding curve, and firm-level balance sheet data within a liquidity-adjusted structural model featuring an endogenous default barrier and a refinancing-adjusted distance-to-default measure. Using bank-level data (1564 daily observations, 2020–2026), the results show that, although the institution remains solvent under conventional structural measures, refinancing exposure materially compresses the effective solvency buffer. Short-term refinancing exposure averages R8.1 billion and reaches approximately R19.6 billion during stress periods; the liquidity-adjusted distance to default averages 1.47 (range 0.46–2.15) and the implied probability of default averages 9.5% (range 1.6–32.2%). A Newey–West heteroskedasticity- and autocorrelation-consistent regression that controls for asset volatility and the underlying solvency ratio confirms that the refinancing ratio has a negative and highly statistically significant partial effect on distance to default (coefficient −1.95, t = −7.41, p < 0.001, N = 1564), isolating the liquidity-adjustment channel from concurrent changes in volatility and balance sheet solvency. Stress testing further reveals nonlinear amplification of default risk when funding and refinancing shocks interact. The findings indicate that bank default risk is driven not only by leverage, but also by the interaction between asset values, liability structure, and funding conditions, with implications for credit risk modelling, stress testing, and prudential risk management.