Working Paper: NBER ID: w14087
Authors: Robin Greenwood; Samuel Hanson; Jeremy C. Stein
Abstract: We argue that time-series variation in the maturity of aggregate corporate debt issues arises because firms behave as macro liquidity providers, absorbing the large supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with relatively more short-term debt, firms fill the resulting gap by issuing more long-term debt, and vice-versa. This type of liquidity provision is undertaken more aggressively: i) in periods when the ratio of government debt to total debt is higher; and ii) by firms with stronger balance sheets. Our theory provides a new perspective on the apparent ability of firms to exploit bond-market return predictability with their financing choices.
Keywords: corporate debt; debt maturity; liquidity provision; government debt
JEL Codes: G32; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government debt maturity (H63) | Corporate debt maturity (G32) |
| Government issues more long-term debt (H63) | Corporate issuers issue more short-term debt (G32) |
| Government issues more short-term debt (H63) | Firms issue more long-term debt (G32) |
| Government debt supply shocks (H63) | Corporate issuance fills maturity gaps (G32) |
| Larger government share of total debt (H63) | More pronounced gap-filling behavior (C92) |
| Stronger balance sheets (G32) | More aggressive gap filling (F12) |
| Corporate maturity choices (D25) | Forecast bond returns (G17) |