The Value of Borrowing Diversity: Evidence from the Financial Crisis of 2007-2009

Abstract

Does borrowing diversity (i.e., borrowing via a larger number of debt types) affect how firms respond to an exogenous credit supply shock? To answer this question I use the recent 2007-2009 credit crisis as a negative exogenous credit supply shock to U.S. non-financial companies. Applying a difference-in-differences methodology, I find that during the crisis companies that ex ante borrowed from many debt types had significantly higher capital expenditures than otherwise similar companies that borrowed from fewer debt types. The former group also had higher market valuations, a lower cost of debt, a lower reduction in debt issuance, higher leverage ratios, and a lower need to use internal cash during the crisis. This evidence is robust to applying an instrumental variable estimation, which takes into account the endogenous nature of the diversity measure.

Keywords: Debt Structure, Credit Crisis, Certification, Hedging, Risk Management

JEL Classification: G32, G31, G33