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dc.contributor.authorXiao, J.
dc.date.accessioned2017-02-16T10:15:11Z
dc.date.available2017-02-16T10:15:11Z
dc.date.issued2016-11-22
dc.identifier.otherCWPE1666
dc.identifier.urihttps://www.repository.cam.ac.uk/handle/1810/262615
dc.description.abstractMicro-level evidence indicates that firms which substituted bank loans with bond issues during the Great Recession did not experience a large contraction in their total borrowing, but they have been hoarding more cash and investing less than firms that did not substitute. This suggests that firms� balance sheet adjustment played a key role in the transmission of aggregate shocks. To evaluate the importance of this mechanism in the propagation of the Great Recession, I build a quantitative general equilibrium model of firm dynamics that jointly endogenizes the composition of borrowing on the liability-side, and the portfolio allocation between savings and investment on the asset-side. Bond issuances have lower intermediation costs than bank debt, but the latter can be restructured when firms are in financial distress. In response to a contraction in bank credit supply, firms substitute bank loans with bond issues and thus become more exposed to the risk of financial distress. This strengthens firms� precautionary incentive to increase cash holdings at the expense of investment, as they optimally trade-off growth against self-insurance via cash holdings. Model simulations suggest that this �precautionary savings� channel can account for 40 percent of the decline in aggregate investment in the first two years of the Great Recession, and more than one-half of the decline in the following five years.
dc.publisherFaculty of Economics
dc.relation.ispartofseriesCambridge Working Papers in Economics
dc.rightsAll Rights Reserveden
dc.rights.urihttps://www.rioxx.net/licenses/all-rights-reserved/en
dc.titleCorporate Debt Structure, Precautionary Savings, and Investment Dynamics
dc.typeWorking Paper
dc.identifier.doi10.17863/CAM.7881


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