External financing of US corporations: Are loans and securities complements or substitutes?

Abstract

“Multiple avenues of intermediation” (Greenspan 2000) suggest substitutability of corporate loan and bond finance which smooths external financing flows. Holmstrom and Tirole (1997) stress complementarity; for most firms bank finance and consequent monitoring is essential for bond finance. Econometric work based on their model is consistent with complementarity both on average over time and during financial crises, and for levels and volatilities. It implies that “multiple avenues” may not be effective as a buffer in a bank credit crunch, and hence supply-side blockages of bank credit may impact on real activity. There are important implications for regulation, not least Basel II.