Commercial Paper, Corporate Finance, and the Business Cycle
- Topics:
- Credit Management
- Tags:
- Commercial Paper,
- Credit Quality,
- Finance
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Overview: High credit quality is a requirement for entry into the commercial paper market, but long-term credit quality (bond rating) is not a sufficient statistic for short-term quality. These characteristics allow firms to issuenear-riskless short-term debt and supply a near-money asset to themarket, thereby reducing their interest costs by the amount of the" commercial paper liquidity premium.This paper provides three explanations for this apparent contradiction, all of which recognize that commercial paper issuers are atypical. First, firms of high credit quality can use commercial paper to finance inventory accumulation during downturns. Second, they also can use commercial paper to finance countercyclical increases in accounts receivable. This suggests that commercial paper issuers serve as intermediaries for other firms during downturns. Third, it may be that portfolio demand for commercial paper -- a highly liquid, safe asset -- increases during downturns.
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Format: PDF | Size: 2,315KB | Date: Mar 2000 | Pages: 60
