Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel

By Livia Chiţu, Magdalena Grothe, Tatjana Schulze, Ine Van Robays

September 15, 2023

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Livia Chiţu, Magdalena Grothe, Tatjana Schulze, and Ine Van Robays. Financial Shock Transmission to Heterogeneous Firms: The Earnings-Based Borrowing Constraint Channel, (USA: International Monetary Fund, 2023) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We study the heterogeneous impact of jointly identified monetary policy and global risk shocks on corporate funding costs. We disentangle these two shocks in a structural Bayesian Vector Autoregression framework and investigate their respective effects on funding costs of heterogeneous firms using micro-data for the US. We tease out mechanisms underlying the effects by contrasting traditional financial frictions arising from asset-based collateral constraints with the recent earnings-based borrowing constraint hypothesis, differentiating firms across leverage and earnings. Our empirical evidence strongly supports the earnings-based borrowing constraint hypothesis. We find that global risk shocks have stronger and more heterogeneous effects on corporate funding costs which depend on firms' position within the earnings distribution.

Subject: Asset prices, Bonds, Corporate bonds, Financial institutions, Labor, Monetary policy, Monetary tightening, Prices, Wages

Keywords: Asset prices, Bonds, Borrowing constraint channel, Constraint hypothesis, Corporate bonds, Corporate spreads, Earnings distribution, Earnings-based borrowing constraint, Funding cost, Global, Global risk shocks, Heterogeneous firms, Monetary policy shocks, Monetary tightening, Shock transmission, Tail firm, Wages

Publication Details

Pages:

52
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/196
Stock No:

WPIEA2023196
ISBN:

9798400252938
ISSN:

1018-5941

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