Explaining Fluctuations in the Composition of Firms' External Finance: New Tests of the Bank Lending Channel
Posted: 12 Apr 1995
Date Written: February 1995
Abstract
Using the insights of a model of debt choice I test the bank lending channel (monetary policy works by directly affecting bank lending). The model stresses the importance of controlling for changes in firm cash flow or even better comparing the behavior of bank debt with other forms of debt for similar quality firms. My tests attempt to do exactly this. At the macro level I compare the behavior of bank lending with finance company lending as well as with all other types of debt, but controlling for changes in economy wide cash flow. At the micro level I utilize a unique data set which combines data on firms intermediated and non- intermediated debt from Moody's manuals with data from Compustat. Using both micro and macro approaches I find little support for a bank lending channel. Instead I find that fluctuations in firm cash flow appear to drive changes in the various debt instruments used by firms, both at the micro and macro level.
JEL Classification: E44, G32
Suggested Citation: Suggested Citation