Crowding Out Bank Loans: Liquidity-Driven Bond Issuance

Abstract

Using corporate balance sheets data following the COVID-19 shock, we provide evidence that the bond market is central to firms' access to liquidity. Contrary to good times, bond issuers increased holdings of liquid assets rather than real investment. Moreover, even though the crisis did not originate in the banking sector, bonds were revealed-preferred to bank loans: many issuers left their bank credit lines untouched, while others used bond proceeds to repay existing bank loans. This liquidity-driven bond issuance implies that while the Federal Reserve intervention revitalized markets, its net effect on firms and the real sector was likely smaller than initially thought.

Keywords: Corporate bonds, liquidity crises, unconventional monetary policy, COVID-19

JEL Classification: G23, E44, G32, E52