Graham, John R. and Leary, Mark T. and Roberts, Michael R., How Does Government Borrowing Affect Corporate Financing and Investment? (April 16, 2014). Available at SSRN: http://ssrn.com/abstract=2425916

“Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we find an economically large and robust negative relation between U.S. federal government debt and corporate debt and investment. A one standard deviation increase in Treasury debt is associated with a one third standard deviation reduction in corporate debt issuances, no significant change in corporate equity issuances, and a one third standard deviation reduction in corporate investment. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for Treasuries. The channel through which this effect operates is financial intermediaries, whose asset portfolios reveal a substitution between federal government debt and corporate debt. The relations between government debt and corporate policies, as well as the substitution between government and corporate debt by intermediaries, are stronger after 1970 when foreign demand increased competition for Treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences firms’ capital structures and investment policies.”