Review of Economic Studies Vol. 85 No. 3 2018
Aggregate Implications of Corporate Debt Choices
Abstract
This article studies the transmission of financial shocks in a model where corporate credit is intermediated via both banks and bond markets. In choosing between bank and bond financing, firms trade-off the greater flexibility of banks in case of financial distress against the lower marginal costs of large bond issuances. I find that, in response to a contraction in bank credit supply, aggregate bond issuance in the corporate sector increases, but not enough to avoid a decline in aggregate borrowing and investment. Keeping leverage constant while retiring bank debt would expose firms to a higher risk of financial distress; they offset this by reducing total borrowing. A calibration of the model to the Great Recession indicates that this precautionary mechanism can account for one-third of the total decline in investment by firms with access to bond markets.
- DOI
- 10.1093/restud/rdx058
- Volume
- 85
- Issue
- 3
- Pages
- 1635-1682
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref