Corporate Debt Structure and the Financial Crisis
35 Pages Posted: 8 Dec 2014 Last revised: 24 Aug 2023
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Corporate Debt Structure and the Financial Crisis
Date Written: December 2014
Abstract
We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008-09, namely the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firm's ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis.
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