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Economic Shocks and Financial Vulnerability
You, Xuesong
You, Xuesong
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Thesis/Dissertation
Date
2021
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Business Administration/Risk Management and Insurance
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http://dx.doi.org/10.34944/dspace/7219
Abstract
This three-chapter dissertation explores firms' responses to financial shocks in three settings: severe climate events, market crash, and unexpected loss shocks.
The first chapter examines how severe climate events affect small business financing outcomes and how they use credit to finance losses, using Hurricane Harvey as my setting. By using the credit reports data of 8,219 small businesses in the Harvey affected area, I estimate a treatment intensity difference-in-differences model where flooding at a firm’s location is the measure of treatment. I find that Harvey-related flooding increased credit delinquencies, especially short-term delinquencies approximately one year after Hurricane Harvey. Delinquencies also increased among firms in the disaster area whose properties were not flooded, suggesting spillover effects from flooded areas. I also find that firms without existing debt took on debt following Harvey. Firms with existing debt lowered loan balances while applying for new credit.
The second chapter considers the funding challenges facing multiemployer defined benefit pension plans. I first explore whether the current funding rules have unintended consequences -- triggering employer withdrawals. The Pension Protection Act of 2006 requires that a multiemployer pension plan with an actuarial funded percentage of less than 80% must take corrective actions to improve financial health. In this paper, a regression discontinuity design is used to establish the causal effect of funding rule requirements on employer withdrawals from multiemployer pension plans. I find that multiemployer pension plans subject to funding rule requirements are about 14 percentage points more likely to experience employer withdrawals. Next, I investigate whether employer withdrawals exacerbate the funding challenges of multiemployer pension plans. Using an event study methodology, I find that plans with ex-ante employer withdrawal experiences are more vulnerable to financial shocks such as the 2008 financial crisis. This study provides important policy implications for regulators concerning best practices to build pension plan resilience to insolvency events.
The third chapter investigates how rivals' loss shocks affect a firm's pricing decisions. I develop a simple theoretical model and predict that a firm's relative financial position matters. Unaffected firms may benefit from rivals' loss shocks by charging a higher price. I empirically examine the relationship in the setting of the U.S. property/casualty insurance industry. I find that insurers who only write personal lines outperform their adversely affected rivals and charge a higher price following rivals' commercial-line loss shocks. The competitive effects of loss shocks are more pronounced in states where rate regulation is not stringent.
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