Aggregate implications of corporate debt choices

Nicolas Crouzet

doi:10.1093/restud/rdx058

Aggregate implications of corporate debt choices

Nicolas Crouzet^*

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

45 Scopus citations

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-offthe 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.

Original language	English (US)
Pages (from-to)	1635-1682
Number of pages	48
Journal	Review of Economic Studies
Volume	85
Issue number	3
DOIs	https://doi.org/10.1093/restud/rdx058
State	Published - Jul 1 2018

Funding

This article was previously circulated under the title 'Corporate Debt Structure and the Macroeconomy'. I amindebted to Patrick Bolton and Ricardo Reis for their continued advice and support on this project. I also thank two anonymous referees as well asAndyAbel, Marco Bassetto, Saki Bigio, John Campbell, MaxCroce, Wei Cui, Fiorella DeFiore, Kinda Hachem, Filippo Ippolito, Victoria Ivashina, Anil Kashyap, Arvind Krishnamurthy, Jennifer La'O, Neil Mehrotra, Konstantin Milbradt, Tommaso Monacelli, Jaromir Nosal, Hyunseung Oh, Mitchell Petersen, Ander Pérez, Thomas Philippon, Josh Rauh, Stephanie Schmitt-Grohé, David Scharfstein, Dmitriy Sergeyev, John Shea, Jón Steinsson, JaumeVentura, MichaelWoodford, and PierreYared for their comments, as well as numerous seminar participants at Bank of England, UCL, CREI, Stanford GSB, Chicago Booth, Kellogg, Notre Dame, the Bank for International Settlements, Bocconi, University of Geneva, Wharton, the European Central Bank, University of Maryland, the Boston Macrofinance Conference, and the Federal Reserve Board.

Keywords

Banks
Bonds
Financial frictions
Financial structure
Firm dynamics
Investment
Output
Productivity risk

ASJC Scopus subject areas

Economics and Econometrics

Access to Document

10.1093/restud/rdx058

Cite this

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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-offthe 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 frictions, Financial structure, Firm dynamics, Investment, Output, Productivity risk",

author = "Nicolas Crouzet",

note = "Funding Information: This article was previously circulated under the title 'Corporate Debt Structure and the Macroeconomy'. I amindebted to Patrick Bolton and Ricardo Reis for their continued advice and support on this project. I also thank two anonymous referees as well asAndyAbel, Marco Bassetto, Saki Bigio, John Campbell, MaxCroce, Wei Cui, Fiorella DeFiore, Kinda Hachem, Filippo Ippolito, Victoria Ivashina, Anil Kashyap, Arvind Krishnamurthy, Jennifer La'O, Neil Mehrotra, Konstantin Milbradt, Tommaso Monacelli, Jaromir Nosal, Hyunseung Oh, Mitchell Petersen, Ander P{\'e}rez, Thomas Philippon, Josh Rauh, Stephanie Schmitt-Groh{\'e}, David Scharfstein, Dmitriy Sergeyev, John Shea, J{\'o}n Steinsson, JaumeVentura, MichaelWoodford, and PierreYared for their comments, as well as numerous seminar participants at Bank of England, UCL, CREI, Stanford GSB, Chicago Booth, Kellogg, Notre Dame, the Bank for International Settlements, Bocconi, University of Geneva, Wharton, the European Central Bank, University of Maryland, the Boston Macrofinance Conference, and the Federal Reserve Board. Publisher Copyright: {\textcopyright} The Author 2017. Published by Oxford University Press on behalf of The Review of Economic Studies Limited.",

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N2 - 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-offthe 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.

AB - 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-offthe 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.

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KW - Firm dynamics

KW - Investment

KW - Output

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Aggregate implications of corporate debt choices

Abstract

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Keywords

ASJC Scopus subject areas

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