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Working Paper
When Liquidity Matters: Firm Balance Sheets during Large Crises
We study how aggregate shocks shape the joint dynamics of credit spreads, debt, and liquid asset holdings for nonfinancial firms, focusing on the Great Financial Crisis (GFC) and COVID-19. Both episodes saw sharp credit spread increases and investment declines, but debt and liquidity fell during the GFC and rose during COVID-19. Cross-sectionally, leverage drove spreads and investment in the GFC, while liquidity dominated during COVID-19. We build a macro-finance model of firm capital structure with a liquidity motive for working capital. Calibrated to data, it attributes the GFC to real and ...
Working Paper
Credit and Liquidity Policies during Large Crises
We study the evolution of firm financials during two large crises: the Great Financial Crisis (GFC) and the COVID-19 pandemic. While the two crises featured similar increases in corporate spreads, corporate debt and liquid asset holdings moved in opposite directions. The micro-data reveal that firm leverage was a more important predictor of firm-level credit spreads and investment during the GFC, but that firm funding liquidity was more important during the pandemic. We augment a dynamic model of firm capital structure with an explicit motive to hold liquid assets, and calibrate it to match ...
Working Paper
Credit and Liquidity Policies during Large Crises
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 real and financial shocks, while COVID-19 also featured liquidity shocks. We ...
Working Paper
Credit and Liquidity Policies during Large Crises
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 ...
Working Paper
Credit and Liquidity Policies during Large Crises
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 real and financial shocks, while COVID-19 also featured liquidity shocks. We ...
Corporate Bond Spreads and the Pandemic IV: Liquidity Buffers
The cost of borrowing rose for most firms during the pandemic-related disruption of financial markets, but firms with greater liquidity have had smaller increases in credit spreads.
Working Paper
When Liquidity Matters: Firm Balance Sheets during Large Crises
We study how aggregate shocks shape the joint dynamics of credit spreads, debt, and liquid asset holdings for nonfinancial firms, focusing on the Great Financial Crisis (GFC) and COVID-19. Both episodes saw sharp credit spread increases and investment declines, but debt and liquidity fell during the GFC and rose during COVID-19. Cross-sectionally, leverage drove spreads and investment in the GFC, while liquidity dominated during COVID-19. We build a macro-finance model of firm capital structure with a liquidity motive for working capital. Calibrated to data, it attributes the GFC to real and ...
Corporate Bond Spreads and the Pandemic II: Heterogeneity across Sectors
The COVID-19 pandemic’s effects on firm borrowing costs have been heterogeneous, with some sectors being more affected than others.
Working Paper
The Local-Spillover Decomposition of an Aggregate Causal Effect
This paper presents a method to decompose the causal effect of government defense spending into: (i) a local (or direct) effect, and (ii) a spillover (or indirect) effect. Each effect is measured as a multiplier: the unit change in output of a one unit change in government spending. We apply this method to study the effect of U.S. defense spending on output using regional panel data. We estimate a positive local multiplier and a negative spillover multiplier. By construction, the sum of the local and spillover multipliers provides an estimate of the aggregate multiplier. The ...
Working Paper
Anatomy of Corporate Credit Spreads: The Great Recession vs. COVID-19
We compare the evolution of corporate credit spreads during the Great Recession and the COVID-19 pandemic. The two crises featured increases of similar magnitudes in the median and cross-sectional dispersion of credit spreads, but the pandemic was short-lived and different sectors were affected. The micro-data reveal larger differences between the two episodes: the Great Recession featured an increase in the across-firm dispersion, and leverage was an important predictor of credit spreads. Differently, the COVID-19 crisis displayed a larger increase in within-firm dispersion, and funding ...