On 23 November 2021, Nobuhiro Kiyotaki (Princeton University) delivered the Fifteenth Paolo Baffi Lecture, exploring the relation between firm financing and economic activity. In opening his talk, Professor Kiyotaki cited new empirical evidence showing that corporate borrowing is mostly backed by the firms' future cashflows rather than their assets. He then illustrated a new theory that rationalizes this phenomenon as a consequence of the different time horizons of entrepreneurs and creditors. The former, owning the human capital necessary to make firms productive, have longer time horizons linked to the business cycle, while the latter are mainly interested in short- to medium-term returns.
The increasing use of "cashflow-based credit" can safeguard debtors and creditors from the volatility stemming from asset valuations; however, it makes them more vulnerable to temporary drops in firms' revenues. Shocks like COVID-19, that had an immediate negative effects on cashflows but not on physical capital, can threaten firm survival and reduce aggregate output. In this context, public intervention following a crisis can contribute to preserve firms' profitability and reduce the risks of long-term scars. Professor Kiyotaki also emphasized the central role of human capital in the entrepreneurial activity, maintaining that public interventions should support education and research in order to boost investment and long-term growth.
