Financial Crowding Out

49 Pages Posted: 24 Jun 2013

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)

Date Written: June 24, 2013

Abstract

Using a novel dataset of accounting and market information that spans most publicly traded firms over the last century, we show that government deficit financing crowds out nonfinancial corporate debt financing and investment. Specifically, an increase in the supply of treasury debt is associated with a significant reduction in corporate leverage, debt issuances, and investment, but no significant change in corporate equity issuances. Further, this crowding out effect is present across industries and is more pronounced for larger, less risky firms whose debt is a closer substitute for treasuries. The channel through which this effect appears to operate is financial intermediaries, whose balance sheets reveal a substitution between lending to the federal government and lending to the corporate sector.

Suggested Citation

Graham, John Robert and Leary, Mark T. and Roberts, Michael R., Financial Crowding Out (June 24, 2013). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3676697 or http://dx.doi.org/10.2139/ssrn.3676697

John Robert Graham

Duke University ( email )

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Mark T. Leary

Washington University in St. Louis - Olin Business School ( 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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HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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