Working Papers

Working Papers

Do Minimum Wage Increases Cause Financial Stress to Small Businesses? Evidence from 15 Million Establishments (with Sudheer Chava and Alex Oettl) (Coming Soon)

Do increases in federal minimum wage impact the financial health of small businesses? Using inter-temporal variation in whether a state's minimum wage is bound by the federal minimum wage and business credit-score data for approximately 15.2 million establishments for the period 1989-2013, we find that increases in federal minimum wage worsen the financial health of small businesses in the affected states. Small, young, labor-intensive, minimum-wage sensitive establishment located in bounded states and businesses located in competitive and low-income areas experience higher financial stress. Increases in minimum wage also lead to lower bank loans, a higher risk of loan default, higher exits and lower entry for affected small businesses. We use various matching methods, including matching of ex-ante credit score levels and trends, and fixed effects to control of unobservable differences in treatment and control groups. The evidence suggests that some small businesses are unable or unwilling to pass-through costs to customers immediately and consequently experience financial stress. Our results document the costs to the one-size-fits-all nationwide minimum wage and highlight how the increases in minimum wages can have an adverse effect on the financial health of small businesses.

-- NBER SI 2019, Entrepreneurship (Scheduled) , EFA 2019 (Scheduled), SFS Cavalcade 2019 (Scheduled), AFA 2019, Midwest Finance Association 2019, Colorado Finance Summit, UT Dallas Finance Conference 2018, Workshop on Workforce Development Initiatives 2018

The Dark Side of Technological Progress? Impact of E-Commerce on Employees at Brick-and-Mortar Retailers (with Sudheer Chava, Alex Oettl, and Linghang Zeng)

Using an employer-employee payroll data set for approximately 2.6 million retail workers, we analyze the impact of the staggered rollout of a major e-commerce retailer's fulfillment centers on the income and employment of workers at geographically proximate brick-and-mortar retail stores. We find that the establishment of an e-commerce fulfillment center in a county has a negative effect on the income of retail workers in that county and in neighboring counties within 100 miles. Wages of hourly workers, especially part-time hourly workers, decrease significantly. This decrease is driven by a drop in the number of hours worked. We observe a U-shaped pattern in which both young and old workers experience a sharper decrease in wage income. Consequently, in these counties, there is a decrease in credit scores and an increase in delinquency for retail workers that have higher prior credit utilization. Using sales and employment data for 3.2 million stores, we find that retail stores in counties around fulfillment centers experience a reduction in sales and in their number of employees. Further, there is a decrease in entry and an increase in exits for stores in the retail sector, with small and young retail stores exiting at a higher rate. Our robustness tests show that our results are unlikely to be driven by prevailing local economic conditions. Overall, our results highlight the extent to which a dramatic increase in e-commerce retail sales can have some adverse consequences for workers at traditional brick-and-mortar stores.

-- Best Paper Award at NFA 2018

-- NBER SI 2018, Midwest Finance Association 2018 (Invited Session), ABFER 2018, CICF 2018, EFA 2018, IT & Digitization, NFA 2018, Summer Finance Conference, ISB 2018, Labour Finance Meetings 2018, CFEA 2018

Worker Mobility and Firm Leverage: Evidence from State Health Mandates (with S Lakshmi Naaraayanan)

We study how changes in intra-firm bargaining through mandated health insurance provision affects financing decisions of firms. We use staggered adoption of state health mandates which significantly reduced worker mobility through the provision of better health insurance coverage by firms to their employees. The resulting worker ‘job-lock’ allow firms to increase financial leverage by lowering operating costs. Consistent with this, we show that following the adoption of high-cost mandates, job turnover among workers reduces significantly, specifically for workers with employer-sponsored health insurance. Further, we find stronger effects among firms that significantly benefit more from this job-lock and subsequently respond by increasing their debt ratios. These effects are stronger for a) firms with small labor pool, b) financially constrained firms and c) firms that operate in industries with higher job mobility. Our results are robust to geographic regression discontinuity design where we focus on firms located in counties adjacent to state borders. Overall, our results are consistent with greater operational flexibility allowing firms to raise financial leverage through an increase in intra-firm bargaining power.

-- SFS Cavalcade-Asia Pacific 2017 , AFA PhD Poster Session 2018, Midwest Finance Association 2018, Asian Finance Association 2018, Financial Management Association 2018 (Scheduled)

Enemy at the Gates: Trade Credit v/s Price Discount as a Strategic Tool

How do financial constraints affect an incumbent supplier firm's choice of extending more trade credit versus offering price discounts when facing an increased threat of entry from competitors? The threatened incumbent supplier firms may (a) extend more trade credit, ex-ante, to defend their market share, (b) reduce prices, or (c) do both. I test these predictions by exploiting plausibly exogenous, staggered removals of product--level entry barriers for Indian manufacturing firms. I find that the average incumbent supplier firm extends 7.9% more trade credit and lowers prices by 9.1% when facing an increased threat of entry. Interestingly, firms with deeper pockets offer longer terms on trade credit, while financially constrained firms rely on price discounts. Also, I find that financially constrained customers accept credit offers, while unconstrained customers accept price discounts. I further confirm my results using various proxies for financial constraints and policy changes in the country that improved access to finance. Overall, I find trade credit as an effective strategic tool to defend market share.

-- ABFER 2016, Pacific-Basin Finance Journal Best Paper Award at AsFA 2016, FIRS 2017, SFS Cavalcade 2017, CFEA 2017, Emerging Market Finance 2017