Essays on Corporate Debt Structure and Monetary Policy Transmission

Abstract

The financing structure of firms has changed markedly over the last few decades as market-based finances have evolved. What's the role of corporate debt structure in monetary policy transmission? This dissertation delves into the heterogeneous impact of monetary policy on nonfinancial firms, examining the role of corporate debt structure in shaping transmission mechanisms.

Chapter 1 explores the spillover effects of the Corporate Bond Purchase Programs on bank-dependent private firms. In particular, I study the Federal Reserve's Secondary Market Corporate Credit Facility (SMCCF) during the COVID-19 pandemic. Using a model that delineates the capital structure channel, the study shows that the spillover effects on non-targeted private firms are limited if the banking sector is not constrained. Moreover, using an event study approach with the loan and bond dataset, the study shows that SMCCF has a limited effect on private firms when its associated banks are not constrained in 2020. The results suggest that despite the implementation of the SMCCF, bank-dependent private firms experienced minimal impact, indicating the program's limited effectiveness in saturated credit markets.

Chapter 2 introduces the concept of the zombie lending channel, uncovering a phenomenon where unviable firms are less affected by contractionary monetary policy due to lenders' inclination to prevent defaults by extending loans. This chapter emphasizes the importance of strengthening bank balance sheets and implementing policies to deter risky lending practices during tight financial conditions. The empirical findings illustrate that during periods of tightening monetary policy, unviable firms, colloquially termed "zombies," tend to receive continued lending support, thereby perpetuating inefficiencies within the financial system.

In Chapter 3, the focus shifts to a particular dataset covering both public and private Spanish firms. The research reveals that firms with higher reliance on bank loans experience a lower interest rate pass-through during expansionary monetary policy shocks. Leverage and liquidity also play significant roles in determining heterogeneous responses to contractionary and expansionary monetary policy measures. Specifically, the results indicate that corporate debt structure significantly influences firms' responses to monetary policy shocks, with leverage and liquidity serving as critical determinants of transmission effectiveness.

Through these three chapters, this dissertation provides insights into the nuanced dynamics between monetary policy, corporate finance, and financial stability, contributing to a deeper understanding of the mechanisms shaping the behavior of nonfinancial corporates in response to monetary policy initiatives.