Does the source of debt financing affect default risk?. Issue 3 (8th January 2018)

• Record Type: Journal Article
• Authors: Chiu, Wan‐Chien; Wang, Chih‐Wei; Peña, Juan Ignacio
• Is Part Of: Review of financial economics. Volume 36:Issue 3(2018)
• Page Start: 232
• Page End: 251
• Publication Date: 2018-01-08
• Subjects: Bank loans -- Debt financing -- Default risk -- Public debt markets -- Supply shock; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1016/j.rfe.2017.03.006
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: We examine whether the source of debt financing is important for assessments of firms' default risk. This study reveals that during the 2007–2010 financial crisis, firms that depend mainly on financing from banks suffer higher increases in default risk than do firms with no such dependence. Conversely, firms that rely solely on financing from public debt markets do not experience significant increases in default risk. These findings suggest that the bank supply shock theory explains the transmission of financial shocks to the real economy. Finally, firms that depend on bank financing cannot offset the adverse impacts of bank lending shocks by substituting bank loans with publicly traded debt.