A Causal Linkage: Corporate Debt and Sovereign Spreads

Jun Hee Kwak ()
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Jun Hee Kwak: Department of Economics, Sogang University, Seoul, Korea

No 2305, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: This study shows that corporate debt accumulation during credit booms can explain increases in sovereign risk during stress periods. Using detailed firmlevel database across six Eurozone countries, I construct granular instruments for aggregate corporate leverage. Instrumental variable regressions indicate that rising corporate leverage causally increases sovereign spreads in Eurozone countries during the debt crisis period of 2010-2012. This result provides the first empirical evidence on the causal link between corporate debt and sovereign debt crises. Additionally, firm-level evidence suggests that highly leveraged firms are likely to pay fewer taxes to the government, contributing to the rise in sovereign risk.

Keywords: Financial Crisis; Corporate Debt; Sovereign Risk; Granular Instrument; Indentification (search for similar items in EconPapers)
JEL-codes: F34 F41 G32 L11 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2023
New Economics Papers: this item is included in nep-cfn and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:2305

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