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Liquidity Backstop, Corporate Borrowings, and Real Effects

69 Pages Posted: 16 Mar 2012 Last revised: 14 Aug 2013

Pengjie Gao

University of Notre Dame - Mendoza College of Business

Hayong Yun

Michigan State University - Department of Finance

Date Written: August 13, 2013

Abstract

This research investigates the real effects of public liquidity provision. Using the Commercial Paper Funding Facility’s (CPFF) eligibility criteria for non-financial commercial paper issuers as the identification strategy, we show that firms with access to the CPFF were able to mitigate the financing disruptions caused by the Lehman Brothers bankruptcy and the ensuing dysfunctional credit market. CPFF directly reduces risk of eligible firms, which in turn improved their financing and short-term profitability. We find liquidity spillover effects from CPFF-eligible firms to their customers through the increased use of trade credit, which propagates the real effects throughout the economy.

Keywords: public liquidity, commercial paper, financial crisis, government intervention

JEL Classification: G18, G21, G28, G32, G38

Suggested Citation

Gao, Pengjie and Yun, Hayong, Liquidity Backstop, Corporate Borrowings, and Real Effects (August 13, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023651 or http://dx.doi.org/10.2139/ssrn.2023651

Pengjie Gao

University of Notre Dame - Mendoza College of Business ( email )

246 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-8048 (Phone)

Hayong Yun (Contact Author)

Michigan State University - Department of Finance ( email )

645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)

HOME PAGE: http://https://sites.google.com/site/hayongy/

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