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Debt Structure

Paper Session

Sunday, Jan. 3, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Mark Leary, Washington University in St. Louis

The Dynamics of Corporate Debt Structure

Michael Halling
,
Stockholm School of Economics
Jin Yu
,
Monash University
Josef Zechner
,
Vienna University of Economics and Business

Abstract

We find that US public firms spread out their debt more across different sources in recession quarters, making measures of debt concentration move pro-cyclically. There is substantial cross-sectional variation in these dynamics. Firms with less leverage and higher debt concentration further decrease leverage and increase debt concentration in recessions. The opposite is true for firms with higher leverage and lower debt concentration. The latter (former) group consists of firms that are larger (smaller), less risky (riskier), have fewer (more) growth options and lower (higher) cash levels. While the fraction of total assets funded by bank debt increases in the recession by approximately 18% of its average non-recession level, the equivalent measure for market debt drops by approximately 7%. Bank debt, in particular, term loans, appears to become more attractive during recession quarters, especially for borrowers characterized by high profitability while firm size, in contrast, has a positive effect on the use of market debt in recessions. A cluster analysis shows that a substantial fraction of firms changes its debt policy over the business cycle. For example, 12% of the firms that exclusively use bond-financing pre-recession switch to bank-financing during recessions.

Secured Credit Spreads and the Issuance of Secured Debt

Efraim Benmelech
,
Northwestern University
Nitish Kumar
,
University of Florida
Raghuram G. Rajan
,
University of Chicago

Abstract

We show that after accounting for selection, credit spreads for secured debt issuances are lower than for unsecured debt issuances, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet firms tend to be reluctant to issue secured debt when other forms of financing are available, as we demonstrate with an analysis of security issuance over time and in particular around the COVID-19 pandemic shock in the United States in early 2020. We find that for firms that are rated non-investment grade and that have few alternative sources of financing in difficult times, the likelihood of secured debt issuance is positively correlated with the spread between traded unsecured and secured bonds. It is not correlated for firms that are investment grade. This pattern of issue behavior is consistent with theories that see collateral as a form of insurance, to be used only in extremis.

Options Trading and Corporate Debt Structure

Jie Cao
,
Chinese University of Hong Kong
Michael Hertzel
,
Arizona State University
Jie Xu
,
Chinese University of Hong Kong
Xintong Zhan
,
Chinese University of Hong Kong

Abstract

Recent empirical studies find that options trading enhances firm value by allowing for a more efficient allocation of firm resources. In this paper, we develop and test the hypothesis that, in addition to a more efficient allocation of firm resources, options trading also enhances firm value through a financing channel, by promoting a debt structure that relies more on public debt and less on more expensive bank financing. Consistent with the hypothesis that enhanced informational efficiency associated with options trading reduces the demand for superior information processing and creditor governance from bank loans, we find active equity options trading leads the firms to shift from bank loans to public bonds. The results are concentrated in firms with high information asymmetry.
Discussant(s)
Kai Li
,
University of British Columbia
Michael Schwert
,
University of Pennsylvania
Vassil Mihov
,
Texas Christian University
JEL Classifications
  • G3 - Corporate Finance and Governance