Paper Spotlight: Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis

Lei Li

Philip E. Strahan

Song Zhang









The COVID-19 pandemic induced an unprecedented “stress test” on the financial system and the ability of banks to supply liquidity to the real economy. A new paper by Lei Li, Phil Strahan, and Song Zhang entitled “Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis” starts with the following important observation: In the last three weeks of March 2020, banks faced the largest increase in takedowns under existing credit lines ever observed – a weekly growth in demand for bank commercial and industrial loans that is 50 times the average weekly growth of the last half century! This unexpected increase in demand for liquidity, due to the COVID-19 shock, created the stress test on banks. The authors find that large banks serving large customers absorbed most of the demand. And, most importantly, pre-COVID financial conditions did not constrain these large banks’ liquidity supply.

Spotlight by Isil Erel
Photos courtesy of Lei Li, Philip E. Strahan, and Song Zhang
First published July 10, 2020

Now Hiring: Data Collection Assistant

UPDATED NOVEMBER 16, 2020: The position has been filled.

The Society of Financial Studies has an opening for a data collection assistant. This is a virtual position, which provides the flexibility to work where you wish. The typical workload is approximately 10 hours per week. Some familiarity with finance journals and papers is preferred. This position pays $20 per hour. Please send CV/resumes to by October 31, 2020.

Paper Spotlight: The Macroeconomics of Corporate Debt

Arvind Krishnamurthy

Markus Brunnermeier

As we emerge from the first wave of shocks induced by the COVID-19 pandemic, we need to start asking pressing questions regarding the future beyond the first round of emergencies. It is an appropriate time to start asking about the long-term adjustments that could be taking place in financial markets and economies and the research questions to match those challenges. This is the main objective of the paper “The Macroeconomics of Corporate Debt” written by Markus Brunnermeier and Arvind Krishnamurthy. One central feature is the high corporate indebtedness going in the crisis; the crisis has only strained firms’ debt services and led to a significant jump in bankruptcies. Leverage will determine the ability of firms to operate successfully in the future and deal with uncertainty. In the same way that the 2008 financial crisis zoomed in on the roles of bank capital structure and bank and nonbank short-term debt, so will this crisis attract attention to credit demand and credit frictions in the corporate sector. Markus and Arvind provide a broad roadmap for future research work that can shed light on corporate finance models. They argue that impactful positive and normative questions on the role of corporate debt, both from a theoretical and empirical perspective, can only be answered when integrating corporate finance into macroeconomic models.

Spotlight by Andrew Ellul
Photos courtesy of Markus Brunnermeier and Arvind Krishnamurthy

Paper Spotlight: Identifying the Real Effects of Zombie Lending

Fabiano Schivardi

Enrico Sette

Guido Tabellini








The impact of COVID-19 has driven many firms into financial distress, and policymakers around the world have responded with various emergency measures to support the business sector. While the immediate priority has been to get support out quickly to firms, over time more active decisions will have to be made on which firms should be supported. A potential danger that arises is that firms that should be allowed to shut down are kept alive as “zombie firms” through the provision of subsidized financing. The literature has found that diverting resources to zombie firms has a negative effect on healthy firms in the same industry. However, in the paper “Identifying the Real Effects of Zombie Lending,” Fabiano Schivardi, Enrico Sette, and Guido Tabellini argue that the literature may suffer from a serious identification problem. Often implicitly, and sometimes explicitly, firm performance is used to identify zombie firms. This is problematic, because a downturn in an industry may be associated with both declining performance of healthy firms and a narrowing of the performance gap between healthy and weak firms. There will therefore be a bias toward finding that healthy firms too suffer in a sector with a high proportion of zombie firms. In analyzing the effects of COVID-19, determining the extent to which zombie financing is a problem will be an important issue both for policymakers and for researchers.

Spotlight by Uday Rajan
Photos courtesy of Fabiano Schivardi, Enrico Sette, and Guido Tabellini
First published July 17, 2020

Code Sharing Policy Effective October 1

The Review of Corporate Financial Studies (RCFS) is enacting a Code Sharing Policy for papers accepted for publication, which will be effective on October 1, 2020. The policy is available here. This policy reflects the commitment of the RCFS to the highest standards of quality, as we believe that the policy will help improve the reproducibility and replicability of published research and by this will support the credibility and impact of this research. The policy does not impose much of a burden on authors. As the policy makes clear, at the moment, data sharing is encouraged but not required. We think that moving forward with a data sharing policy is more complicated and requires coordination with other leading journals. We are conducting conversations along these lines and will continue to do so under our commitment to the highest standards of quality for academic research in finance.

Paper Spotlight: Institutional Investors and Hedge Fund Activism

Xianjue Wang

Laura Starks

Simi Kedia

The relationship between hedge fund activists and institutional shareholders in firms targeted by activists could be fraught with conflicting interests, making it a very important question to explore. In the paper “Institutional Investors and Hedge Fund Activism,” Simi Kedia, Laura Starks, and Xianjue Wang study how differences among institutional investors impact their willingness to support hedge fund activists, the impact on the campaign’s success, and potential value created from hedge fund activism. Simi, Laura, and Xianjue find that “activism-friendly institutional ownership” is associated with a much greater likelihood, than other types of institutional ownership, with the propensity of a firm being targeted. This result is suggestive of an assortative match between hedge fund activists and the firm’s ownership base. The paper also finds that pre-event activism-friendly ownership is associated with significantly higher long-term stock returns and operating performance of the target firm. These results help us understand how a firm’s ownership, specifically the type of institution, matters for the success of failure of campaigns. They are consistent with a role for the activism-friendly institutions in creating the right environment for hedge fund activists to push for changes in firm decisions and the subsequent impact on firm value. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Simi Kedia, Laura Starks, and Xianjue Wang

Paper Spotlight: The COVID-19 Shock and Equity Shortfall: Firm Level Evidence from Italy

Elena Carletti

Marco Pagano

Loriana Pelizzon







Marti Subrahmanyam

Tommaso Oliviero

Having learned from the financial crisis, policymakers the world over have reacted to the COVID-19 lockdowns by providing a lot of liquidity, in the form of debt, to the business sector. However, the longer it takes to make a full recovery, the greater is the danger that firms may find themselves not just illiquid in the short-run, but insolvent in the long-run. That is, liquidity shortfalls may turn into equity shortfalls. In the paper “The COVID-19 Shock and Equity Shortfall: Firm Level Evidence from Italy,” the authors Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, and Marti G. Subrahmanyam quantify the size of the expected equity shortfalls for a sample of almost 81,000 Italian firms. The results are sobering. The authors forecast that COVID-related profit reductions will lead to about 17% of the firms in their sample having negative net worth in a year. These firms employ 8.8% of the workers in the sample.  Overall, reductions in equity may amount to 10% of 2018 GDP. Of course, forecasts are necessarily noisy at this stage, and the long-term effects of COVID on the corporate sector will only be known with time. Nevertheless, the results highlight the need for policymakers to support firms through equity injections in addition to liquidity. Given the heterogeneous effect of COVID on different sectors, an important challenge will be determining which firms to support.

Spotlight by Uday Rajan
Photos courtesy of Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, and Marti G. Subrahmanyam

Paper Spotlight: The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID

Sascha Steffen

Viral V. Acharya

Governments all over the world have responded to the COVID-19 outbreak by closing down significant parts of their economies, leading to a liquidity crisis for many firms. Default risk increased because firms’ stream of cash flows took a hit, and with it firms’ rollover risk. How did firms behave in their bid to shore up their precarious liquidity positions? In the paper “The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID,” Viral Acharya and Sascha Steffen use a novel dataset of daily credit line drawdowns at the firm-loan-level and find evidence consistent with a “dash for cash” of BBB-rated firms. This was particularly true of firms that had similar credit quality to non-investment-grade rated ones. The risk of becoming a fallen angel, i.e. losing investment grade status, played a very significant role. These firms managed to convert committed credit lines into cash which, in turn, placed pressure on banks’ balance sheets. While these results show that banks’ financial health improved markedly in the decade after the 2008 financial crisis, they also shed light on the pressure brought to bear on banks from the accelerated drawdowns of credit lines and provisions for possible future credit losses. There is an important message from the paper: Regulators should keep a very close eye on banks’ financial health and either require or nudge them to do everything possible to conserve capital by, for example, withholding dividend payments or stopping share repurchases.

Spotlight by Andrew Ellul
Photos courtesy of Viral V. Acharya and Sascha Steffen