Comments on "Corporate bond use in Asia and the United States"

Gregory Duffee and Peter Hordahl examine the use of corporate bond financing by firms in the United States and Asia with a view to understanding both the decision to issue corporate bonds and the magnitude of bond financing conditional on having bond debt. Many economists consider the low use of corporate bonds by Asian firms as an infrastructure problem arising from poor institutions. The lack of access to corporate bond markets makes it difficult for firms in Asia to switch to non-bank sources and renders them more vulnerable to bank credit supply shocks. The major strength of the Duffee-Hordahl paper is its focus on understanding the infrastructure problem, since policies that aim to strengthen bond market infrastructure and stimulate corporate bond supply are rooted in the idea that access to corporate bonds would dampen the effect of macroeconomic fluctuations on real activity. Duffee and Hordahl break new ground by constructing measures of the bond and bank leverage of firms in the United States and Asia and by decomposing cross-regional differences in bond leverage into those due to (i) cross-regional differences in the probability of a firm using bonds, conditional on firm characteristics, (ii) cross-regional differences in the amount of bonds a firm has, conditional on firm characteristics, and (iii) cross-regional differences that arise due to variations in the types of firms that operate in Asia and the United States. Thus, the empirical setup in the Duffee-Hordahl paper can decompose differences in bond leverage into those due to bond infrastructure (markets and institutions) and those due to firm characteristics. Their conclusion is that fewer Asian firms than US firms have corporate debt. Many Asian firms do not access corporate bond markets and the differences are stark for small firms. Asian small firms are much less likely to have corporate debt than US small firms. And, even among firms that do use corporate debt, bond leverage is lower in Asia than in the United States. They point out that firms in Asia largely rely on bank debt to fund external financing needs, while US firms rely on both bank loans and public debt.