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Aggregate Implications of Corporate Debt Choices

Nicolas Crouzet

Review of Economic Studies, 2018, vol. 85, issue 3, 1635-1682

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 (search for similar items in EconPapers)
Date: 2018
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