Journal Article

Aggregate Implications of Corporate Debt Choices

Nicolas Crouzet

in The Review of Economic Studies

Volume 85, issue 3, pages 1635-1682
Published in print July 2018 | ISSN: 0034-6527
Published online October 2017 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdx058
Aggregate Implications of Corporate Debt Choices

More Like This

Show all results sharing these subjects:

  • Macroeconomics: Consumption, Saving, Production, Employment, and Investment
  • Banking
  • Bankruptcy

GO

Show Summary Details

Preview

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.

Keywords: Banks; Bonds; Financial structure; Financial frictions; Firm dynamics; Output; Investment; Productivity risk

Journal Article.  27798 words.  Illustrated.

Subjects: Macroeconomics: Consumption, Saving, Production, Employment, and Investment ; Banking ; Bankruptcy

Full text: subscription required

How to subscribe Recommend to my Librarian

Users without a subscription are not able to see the full content. Please, subscribe or login to access all content. subscribe or purchase to access all content.