A rigorous analysis of long-term debt issuance suggests that market conditions as well as variations in the supply of long-term US Treasury issues affect when corporate issuers tap bond markets for longer-dated borrowings.

The authors endeavor to understand what drives long-term corporate debt issuance by considering how credit market conditions, such as shifts in the maturity composition of US government debt and changes in the term structure of interest rates, motivate long-term borrowings. Additionally, the authors consider the supply elasticity of borrowers in response to changes in credit markets.

The focus of their research is a vast dataset of corporate bank and public market borrowings over a 22-year period, which they overlay with Treasury supply data and ongoing reviews of credit market conditions. On the basis of these data, the authors construct and run different regression models to capture the relationships between existing maturities of Treasury debt and corporate issuers’ choice of maturity, taking into account credit market conditions and the supply of US government paper. The models control for firm characteristics, credit and term structure spreads, and the composition of Treasury debt.

The relationship between corporate debt maturities and changes in the supply of Treasuries is nonlinear. At maturities equal to or greater than 20 years, the occurrence of gap filling is meaningful, demonstrating increased supply elasticity. This result does not hold at the short end of the maturity spectrum. Moreover, the effect is heightened significantly for A– to AAA issuers relative to BBB rated ones. Such gap filling may affect a firm’s proclivity to borrow as well. Indeed, the Federal Reserve’s policy of quantitative easing is an inducement for long-term corporate borrowing through the central bank’s purchase of long-term Treasury bonds.

The authors’ research would benefit credit analysts, corporate Treasury departments, and policymakers interested in the factors that motivate bond issuance.

The literature on gap filling and corporations’ choice of debt maturity informs the authors’ investigation. They compile and analyze a detailed dataset that consists of individual corporate loans (29,110) and bonds (10,040) for 5,041 companies from 1987 to 2009 taken from Thomson Reuters’ SDC (bank and nonbank lender-originated corporate loans) and DealScan (new nonconvertible debt issues) databases. Excluded are those issues whose maturity likely matches the economic life of the underlying collateral and financial issuers subject to regulatory restriction and capital requirements that could motivate asset/liability matching. Examination of individual issues rather than time-series variations in debt issuance allows for more granular and precise research. The authors focus on only US companies and long-term bonds because of the homogeneity of tax laws and the expectation of US companies’ greater susceptibility to changes in the US government debt maturity structure compared with that of foreign borrowers. Finally, firm-level financial data from Compustat and monthly data on the long-term Treasury supply and credit market conditions round out the dataset.

The authors construct both linear and multinomial regression models to determine whether long-term debt issues are more sensitive to market conditions than short- and intermediate-term ones, whether high-quality issuers’ maturity selection is more sensitive to changes in the supply of Treasuries than that of lower-quality issuers, and finally, whether the supply of Treasury bonds affects firms’ willingness to borrow. They acknowledge that such relationships are often nonlinear but use linear models to enable comparison with earlier research.

Their research confirms that a negative and significant relationship exists between (1) the maturity of corporate issues and the average maturity of Treasuries and (2) the fraction of Treasuries with maturities equal to or greater than 20 years. The use of multinomial models better gauges the nonlinearity of firm features and gap filling for choice of maturity issuance. Changes in the supply of Treasuries affect issuance meaningfully only for maturities of 20 years or greater. A negative correlation exists between the supply of long-term government paper and long-term corporate issuance. The effect is greater for highly rated credits as well. Inducements for gap filling may affect the likelihood that a firm will borrow.

Finally, to address endogeneity concerns, the authors conduct an event study that assesses the effect of the US government’s decision to suspend 30-year bond issuance in 2001—an effort to reduce borrowing costs and long-term interest rates. This supply shock produces a meaningfully abnormal return on Treasuries that is segmented only for 30-year Treasury bonds. The suspension of 30-year Treasuries causes a more meaningful increase in the proportion of issues exceeding 30 years (versus 20) for A– to AAA rated bonds than for BBB rated ones. The study confirms the presence of gap filling.

Variation in the supply of long-term Treasury bonds influences long-term corporate debt issuance. Specifically, creditworthy firms often issue bonds with maturities at the long end of the term structure (20 years or more). There is an inverse relationship between such outstanding long-term corporate bonds and long-term Treasury bonds of similar maturities, a phenomenon known as gap filling. Both market conditions and the supply of long-term Treasuries affect the timing of longer-term corporate borrowings. A possible area of further study would be to what extent similar influences may be at work in other developed economies with deep government and corporate credit markets.