Credit and Liquidity Policies During Large Crises
54 Pages Posted: 14 Oct 2020 Last revised: 30 Sep 2022
Date Written: October, 2020
We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of productivity and financial shocks, while COVID-19 also featured liquidity shocks. We study the state-dependent effects of credit and liquidity policies.
Keywords: credit spreads, liquidity, Great Recession, COVID-19
JEL Classification: E6, G01, H0
Suggested Citation: Suggested Citation