Research

Abstract: We uncover a new channel—the zombie lending channel—in the transmission of monetary policy to nonfinancial corporates. This channel originates from the presence of unviable and unproductive (zombie) firms. We identify exogenous variation in monetary conditions around the world by exploiting the international transmission of US monetary policy shocks. We find that tighter monetary policy leads to more favorable credit conditions for zombie firms relative to other firms. Zombies are then able to cut investment and employment by relatively less. This is indicative of evergreening motives by lenders when interest rates rise: lenders face incentives to restructure existing loans of zombie firms to avoid the realization of losses on their balance sheets. Policies that strengthen banks’ balance sheets, that limit banks’ incentives to engage in risky behavior, and laws that allow an efficient resolution of weak firms, may help mitigate zombie lending practices when financial conditions tighten. 

Abstract: This paper examines the spillover effects of the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF), launched in March 2020 to support the corporate bond market during the COVID-19 pandemic. While recent literature has studied its impact on the corporate bond market, less is known about its effect on the alternative financing market, such as the bank loan market. This paper focuses on how SMCCF impacts the corporate loan market and bank-dependent private firms through the capital structure channel: public firms with access to the bond market tend to issue more bonds than loans, thereby allowing banks to increase loan supply to private firms lacking access to the bond market. The empirical study utilizes a borrower-lender-level dataset matching DealScan, TRACE, Compustat/Capital IQ, and Call report data. The sample includes 3,486 public firms and 733 private firms participating in the US syndicated loan market from 2016 to 2022. Employing a Difference-in-Differences (DID) approach, the analysis explores changes in loan demand and supply pre- and post-SMCCF announcements, comparing private and public firms. Results indicate a shift in demand from loans to bonds for public firms, leading to fewer loan originations with lower interest rates. Furthermore, banks with higher exposure to public firms are more inclined to lend to private firms, particularly if these banks face capital constraints. The study also includes a theoretical model outlining the transmission channel, demonstrating its operation exclusively through banks with capital constraints. The findings indicate that SMCCF had limited spillover effects on bank-dependent private firms because the banking sector was not constrained in 2020. This research provides insights into the transmission mechanism of corporate bond purchase programs on loan markets and suggests that such programs have limited effects in saturated credit markets.

Abstract: An increasing share of firms borrows from the public financing market, in addition to banks. The paper shows that corporate debt structure matters for the credit channel of monetary policy transmission. Firms with higher dependence on loans experience a lower interest rate pass-through in their borrowing and investment after expansionary monetary policy shocks. But there are no significant differences in responses to contractionary monetary policy shocks. Moreover, this paper shows that leverage matters more for heterogeneous responses to contractionary monetary policy shocks while liquidity matters more for expansionary shocks.