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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 ...
Working Paper
Corporate Borrowing, Investment, and Credit Policies during Large Crises
We compare the evolution of corporate credit spreads during two large crises: the Great Financial Crisis (GFC) and the COVID-19 pandemic. These crises initially featured spread increases of similar magnitudes, but the pandemic was much more short-lived. The microdata reveal that firm leverage was a more important predictor of credit spreads during the GFC, but that firm liquidity was more important during the pandemic. In a model of the firm capital structure that is calibrated to match the joint distribution of leverage, liquidity, and credit spreads, we show that the GFC resembled a ...
Working Paper
Optimal Debt Dynamics, Issuance Costs, and Commitment
We investigate optimal capital structure and debt maturity policies in the presence of fixed issuance costs. We identify the global-optimal policy that generates the highest values of equity across all states of nature consistent with limited liability. The optimal policy without commitment provides almost as much tax benefits to debt as does the global-optimal policy and, in the limit of vanishing issuance costs, allows firms to extract 100% of EBIT. This limiting case does not converge to the equilibrium of DeMarzo and He (2019), who report no tax benefits to debt when issuance costs are ...
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 main 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. ...
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 ...