How Does Government Borrowing Affect Corporate Financing and Investment?

53 Pages Posted: 18 Apr 2014 Last revised: 6 Oct 2014

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Mark T. Leary

Washington University in St. Louis - Olin Business School; National Bureau of Economic Research (NBER)

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 28, 2014

Abstract

Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we show that U.S. federal government debt issuance significantly affects corporate financial policies and balance sheets through its impact on investors’ portfolio allocations and the relative pricing of different assets. Government debt is strongly negatively correlated with corporate debt and investment, but strongly positively correlated with corporate liquidity. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for Treasuries. Indeed, we find a strong negative relation between the BAA-AAA yield spread and government debt, highlighting the greater sensitivity of more highly rated credit to variation in the supply of Treasuries. The channel through which this effect operates is investors’ portfolio decisions: domestic intermediaries actively substitute between lending to the federal government and the nonfinancial corporate sector. The relations between government debt and corporate policies, as well as the substitution between government and corporate debt by intermediaries, are stronger after 1970 when foreign demand increased competition for Treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences firms’ capital structures and investment policies.

Keywords: Capital Structure, Cash Policy, Investment, Government Debt, Fiscal Policy, Safe Assets

JEL Classification: E22, E44, E51, G31, G32, G20

Suggested Citation

Graham, John Robert and Leary, Mark T. and Roberts, Michael R., How Does Government Borrowing Affect Corporate Financing and Investment? (September 28, 2014). Available at SSRN: https://ssrn.com/abstract=2425916 or http://dx.doi.org/10.2139/ssrn.2425916

John Robert Graham

Duke University ( email )

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National Bureau of Economic Research (NBER)

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Mark T. Leary

Washington University in St. Louis - Olin Business School ( email )

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National Bureau of Economic Research (NBER) ( email )

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Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

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Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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