The Effects of Financing Frictions in Investment-Grade Debt Markets

Abstract

Using micro-level data on investor-underwriter-issuer relationships, we uncover significant supply-side frictions in the U.S. corporate public debt markets. Even firms issuing investment-grade debt, except for AAA-rated issues, face credit supply frictions. Separating supply-side preferences from those of the firm, we show that firm debt maturity is as sensitive to the financier’s preferences as to a firm’s own debt maturity structure. Preference mismatch between firms and their financiers regarding debt maturity reduces debt issuance amounts. Recently, exogenous factors such as prolonged low interest rates have increased this firm-financier maturity preference mismatch, resulting in less corporate debt and slower firm asset growth.