Christian Jauregui, UC - Berkeley
This paper studies the effect of bank lending frictions on firms' corporate debt choices and behaviors in product markets, whereby debt composition consists of bank loans and (market-based) bond issuances. I document a hump-shaped relationship between a firm's reliance on market financing and its product (price-marginal) cost markup: on average, markups rise with their share of market debt in total financing before reaching a peak at a share exceeding half, between 52–60 percent, after which markups then decline. In response to a bank credit crunch, this hump-shaped relationship shifts inward for predominately market-financed firms, while outward for mixed and mostly bank-financed firms. To explain this cross-sectional pattern, I develop a quantitative model of firm dynamics in a monopolistically competitive economy. The model's predictions find support in cross-sectional moments on debt structure and markups of US public firms. This reaction to credit disruptions helps explain the dampened response of inflation in the aftermath of the 2008–09 financial crisis.