Crowded out from the Beginning: Impact of Government Debt on Corporate Financing

61 Pages Posted: 25 Feb 2020 Last revised: 13 Aug 2020

See all articles by Cagri Akkoyun

Cagri Akkoyun

Analysis Group, Inc. - Dallas Office

Nuri Ersahin

Michigan State University-Department of Finance

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: January 31, 2020

Abstract

Using hand-collected data on corporate bond and stock offerings, we identify the impact of government debt on corporate financing during World War I. The early twentieth century provides a unique opportunity to identify the impact of government debt on private financing because during this period (1) firms announced the amount they wanted to raise before each security offering and (2) the Treasury issued debt in discrete intervals. We identify the impact of Treasury issues by comparing differences in the amount firms offered to the amount they actually raised when the Treasury was borrowing to when the Treasury was not in the market. We find that long term government bond offerings negatively affect both amount of long-term corporate bonds and dividend paying stocks issued. In contrast, we find no effect of government bond offerings on short term debt issue. Our findings suggest that investors view dividend paying stocks as a close substitute for relatively safe long-term bonds.

Keywords: Government Debt, Crowding Out, Capital Structure, War Finance

JEL Classification: E44, G20, N42

Suggested Citation

Akkoyun, Cagri and Ersahin, Nuri and James, Christopher M., Crowded out from the Beginning: Impact of Government Debt on Corporate Financing (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3528945 or http://dx.doi.org/10.2139/ssrn.3528945

Cagri Akkoyun

Analysis Group, Inc. - Dallas Office ( email )

2911 Turtle Creek Boulevard
Suite 600
Dallas, TX 75219
United States

Nuri Ersahin (Contact Author)

Michigan State University-Department of Finance ( email )

East Lansing, MI 48824
United States
8478686532 (Phone)

HOME PAGE: http://sites.google.com/site/nuriersahin/

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

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