Financial Risks of Private Firms

This thesis investigates three sources of private firms’ financial risk. It includes a short synopsis and three self-contained essays that can be read independently and constitute the product of my doctoral studies in financial accounting at Copenhagen Business School.
The first paper, ”Criminals, Bankruptcy, and Cost of Debt” (co-authored with Morten Seitz and published in Review of Accounting Studies 26 (3), 1004–1045, 2021) investigates whether criminal CEOs or a high proportion of criminal employees are associated with a higher likelihood of bankruptcy or a higher cost of debt. Using a nationwide sample of private firms and their employees’ crimes, we find that both criminal CEOs and a high proportion of criminal employees are associated with a higher likelihood of bankruptcy. These results hold in out-of-sample predictions and across salary levels of employees as well as across the type and severity of crimes. Though less robust, we find some evidence that lenders consider whether firms have a criminal CEO or a high proportion of criminal employees and price their debt accordingly.
In the second paper, ”Government Support and Bankruptcy,” I investigate whether dif-ferences in firms’ access to government support during the COVID-19 pandemic affect their likelihood of bankruptcy. Specifically, I exploit a setting with plausibly exogenous variation in the time between firms’ application date and the Danish government’s decision to provide support and find that the decision time significantly and economically increases firms’ likeli-hood of bankruptcy. Estimation results show that the likelihood of bankruptcy increases by between 3.19 (0.04) to 29.34 (0.71) percent (percentage points), depending on the support type and model specification when firms experience a one standard deviation higher wait time to receive support. This study’s setting addresses the difficulty of separating the endogenous link between governments’ decision to provide support and firms’ performance and thus provides the first causal evidence of the effectiveness of government support.
In the third paper, ”Environmental Lender Preferences and SMEs,” I investigate whether lenders price environmental activities of private small- and medium-sized enterprises (SMEs), which face limited public scrutiny of their environmental performance. Using a unique and proprietary dataset on firms’ garbage recycling, I find that SMEs with more environmentally friendly (damaging) activities are associated with a lower (higher) cost of debt. These results are only present in recent years, possibly because lenders face increasing pressure to incor-porate environmental considerations in their lending decisions over time. I find no evidence that SMEs’ environmental activities are associated with their likelihood of bankruptcy or that environmentally friendly activities have superior productivity benefits. In addition, SMEs with more environmentally damaging activities are more likely to obtain equity financing, possibly because lenders charge them more for debt.