A Discrete Choice Model for Large Heterogeneous Panels with Interactive Fixed Effects with an Application to the Determinants of Corporate Bond Issuance

This paper studies the effect of funding costs on the conditional probability of issuing a corporate bond in a novel dataset covering 5610 issuances by US financial and non-financial corporates over the period from 1990 to 2014. But identification of these effects is complicated by unobserved shocks such as a changing regulatory landscape or the global financial crisis. To account for these shocks, we extend the common correlated effects estimator to settings where outcomes are discrete. Both the asymptotic properties and the small sample behavior of this approach are documented. We find that for non-financial corporates, yields are negatively related to bond issuance but that effect is larger in the pre-crisis period. Splitting the data by the credit rating of the issuer reveals that the negative relationship between yields and corporate bond issuance is driven by firms with a low credit rating