Corporate Debt Structure and Economic Recoveries

This paper analyzes the business cycle behavior of the corporate debt structure and its interaction with economic recovery. The debt structure is measured as the share of bonds in the total credit to non-financial corporations for a quarterly panel of twenty five economies over the period 1989-2013. We first show that the substitution of loans for bonds in recoveries is a regular property of business cycles. Secondly, we provide evidence that economies with high bond share and important bond-loan substitution recover from the recessions faster. The relation between the corporate debt structure and the economic recovery is maintained when controls for the developments of financial markets are introduced. A theoretical model is developed to explain this relation as the outcome of financial constraints on bank credit supply.