Bond vs Bank Finance and the Great Recession
11 Pages Posted: 30 Jul 2020
Date Written: April 1, 2020
The typical increase of the corporate bond-to-bank ratio during downturns is known to mitigate business cycle recessions. In the three longest and deepest post-war U.S. recessions this ratio didn't increase from their outsets. In this paper we focus on the timing of the corporate bank-to-bond substitution in the Great Recession, simulating counterfactual paths for output growth under plausible notional behaviors of the bond-to-bank ratio. We find that the Great Recession would have been milder and the recovery much stronger if the bank-to-bond substitution had started since the outset of the recession and evolved thereafter as in most U.S. recessions.
Keywords: corporate finance, bond finance, bank finance, Great Recession, business cycle
JEL Classification: E32, E44, G00
Suggested Citation: Suggested Citation