We empirically study the corporate propensity to save from bonds versus loans. Our findings indicate that firms save approximately 14 cents of every dollar borrowed through bonds, while they do not exhibit similar savings behavior with loans. Saving from bonds is pervasive over time, and in the cross-section pledgeability is a key driver of this behavior. Specifically, we find that lower asset tangibility and shorter asset maturities are linked to substantial increases in saving rates from bond borrowings. We show that our results align with a model that incorporates external financing frictions and costly default.

We study the impact of sovereign risk on the credit risk of the non-financial corporate sector in the Eurozone using credit default swap data. We show that an increase in sovereign credit spreads is associated with a statistically and economically significant increase in corporate spreads and, hence, firms’ borrowing costs. A deterioration in a country’s credit quality affects more adversely firms that are more likely to benefit from government aid, those whose sales are more concentrated in the domestic market, and those that rely more heavily on bank financing. Our findings suggest that government guarantees, domestic demand, and credit markets are important credit risk transmission mechanisms.

We show that the structure and pricing of debt in LBOs mostly depend on a single characteristic of the target firm, pre-LBO profitability. We find a positive relationship between pre-LBO profitability and deal leverage that is consistent with a dynamic trade-off theory of capital structure in the presence of adjustment costs. We argue that the wide range of debt tranches used in LBO financing can be folded into two main categories, senior and junior debt, where the pricing of senior and junior debt depends on their relative use and on bankruptcy risk. Our evidence also suggests that senior lenders oversupply cheap credit during hot buyout markets.