Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel

Livia Chiţu, Magdalena Grothe, Tatjana Schulze and Ine Van Robays

No 2023/196, IMF Working Papers from International Monetary Fund

Abstract: We study the heterogeneous impact of jointly identified monetary policy and global risk shocks on corporate funding costs. We disentangle these two shocks in a structural Bayesian Vector Autoregression framework and investigate their respective effects on funding costs of heterogeneous firms using micro-data for the US. We tease out mechanisms underlying the effects by contrasting traditional financial frictions arising from asset-based collateral constraints with the recent earnings-based borrowing constraint hypothesis, differentiating firms across leverage and earnings. Our empirical evidence strongly supports the earnings-based borrowing constraint hypothesis. We find that global risk shocks have stronger and more heterogeneous effects on corporate funding costs which depend on firms' position within the earnings distribution.

Keywords: Corporate spreads; earnings-based borrowing constraint; heterogeneous firms; monetary policy shocks; global risk shocks; constraint hypothesis; borrowing constraint channel; shock transmission; earnings distribution; funding cost; tail firm; Bonds; Wages; Corporate bonds; Asset prices; Monetary tightening; Global (search for similar items in EconPapers)
Pages: 52
Date: 2023-09-15
New Economics Papers: this item is included in nep-cfn, nep-fdg, nep-ifn and nep-mon
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