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Working Paper
Credit and Liquidity Policies during Large Crises
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of real and financial shocks, while COVID-19 also featured liquidity shocks. We ...
Working Paper
The Fed Takes On Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF
This paper evaluates the efficacy of the Secondary Market Corporate Credit Facility, a program designed to stabilize the U.S. corporate bond market during the COVID-19 pandemic. The program announcements on March 23 and April 9, 2020, significantly reduced investment-grade credit spreads across the maturity spectrum—irrespective of the program’s maturity-eligibility criterion—and ultimately restored the normal upward-sloping term structure of credit spreads. The Federal Reserve’s actual purchases reduced credit spreads of eligible bonds 3 basis points more than those of ineligible ...
Working Paper
Asymmetric Information, Dynamic Debt Issuance, and the Term Structure of Credit Spreads
We propose a tractable model of a firm?s dynamic debt and equity issuance policies in the presence of asymmetric information. Because ?investment-grade? firms can access debt markets, managers who observe a bad private signal can both conceal this information and shield shareholders from infusing capital into the firm by issuing new debt to service existing debt, thus avoiding default. The implication is that the ?asymmetric information channel? can generate jumps to default (from the creditors? perspective) only for those "high-yield" firms that have exhausted their ability to borrow. ...
Working Paper
Credit and Liquidity Policies during Large Crises
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of real and financial shocks, while COVID-19 also featured liquidity shocks. We ...
Working Paper
An Empirical Analysis of the Cost of Borrowing
We examine borrowing costs for firms using a security-level database with bank loans and corporate bonds issued by U.S. companies. We find significant within-firm dispersion in borrowing rates, even after controlling for security and firm observable characteristics. Obtaining a bank loan is 132 basis points cheaper than issuing a bond, after accounting for observable factors. Changes in borrowing costs have persistent negative impacts on firm-level outcomes, such as investment and borrowing, and these effects vary across sectors. These findings contribute to our understanding of borrowing ...
Working Paper
Credit and Liquidity Policies during Large Crises
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of productivity and financial shocks, while COVID-19 also featured liquidity ...
The Comovement between Credit Spreads, Corporate Debt and Liquid Assets in Recent Crises
Credit spreads rose sharply during the 2008 financial crisis and the COVID-19 crisis. But their movement with corporate debt and liquid assets differed during those two periods.
Working Paper
Credit and Liquidity Policies during Large Crises
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of real and financial shocks, while COVID-19 also featured liquidity shocks. We ...
Working Paper
Corporate Borrowing, Investment, and Credit Policies during Large Crises
We compare the evolution of corporate credit spreads during two large crises: the Great Financial Crisis (GFC) and the COVID-19 pandemic. These crises initially featured spread increases of similar magnitudes, but the pandemic was much more short-lived. The microdata reveal that firm leverage was a more important predictor of credit spreads during the GFC, but that firm liquidity was more important during the pandemic. In a model of the firm capital structure that is calibrated to match the joint distribution of leverage, liquidity, and credit spreads, we show that the GFC resembled a ...
Working Paper
An Empirical Analysis of the Cost of Borrowing
We examine borrowing costs for firms using a security-level database with bank loans and corporate bonds issued by U.S. companies. We find significant within-firm dispersion in borrowing rates, even after controlling for security and firm observable characteristics. Obtaining a bank loan is 132 basis points cheaper than issuing a bond, after accounting for observable factors. Changes in borrowing costs have persistent negative impacts on firm-level outcomes, such as investment and borrowing, and these effects vary across sectors. These findings contribute to our understanding of borrowing ...