According to conventional wisdom, banks play a special role in providing liquidity in bad times, while capital markets are used to fund investment in good times. Using microdata on corporate balance sheets following the COVID-19 shock, we provide evidence that instead, the corporate bond market is central to firms' access to liquidity, crowding out bank loans even when the crisis did not originate in the banking sector. We first show that, contrary to good times, bond issuance is used to increase holdings of liquid assets rather than for real investment. Second, most issuers, including many riskier "high-yield" firms, prefer issuing bonds to borrowing from their bank. Over 40% of bond issuers leave their credit line untouched in 2020Q1. Moreover, a large share of bond issuance is used to repay existing bank loans. This liquidity-driven bond issuance suggests that the V-shaped recovery of bond markets, propelled by the Federal Reserve, is unlikely to lead to a V-shaped recovery in real activity.
Darmouni, Olivier, and Kerry Siani. "Crowding Out Bank Loans: Liquidity-Driven Bond Issuance." Columbia Business School, October 30, 2020.
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