External finance premium: market finance versus bank finance

This paper is the first to simultaneously examine firms’ market-based and bank-based external finance premia and investigate the behavior of corporate bond markets in the United States and the euro area, with a focus on country- and state-level heterogeneity in monetary unions. Using a unique micro-level dataset, we show that market finance premia, measured with corporate bond spreads, are remarkably similar in both the euro area and the US in terms of how little they depend on the issuer’s state or country of origin. In neither monetary union is the transmission of monetary policy to corporate bond rates differentiated as a function of the state or country of issuer. Unconditionally, the state or country of origin of the bond issuers explains very little of the variance among corporate bond spreads, in stark contrast to bank loan spreads that are determined at the country level for the same sample of bond-issuing firms. The euro area corporate bond market is as integrated as the US one, contrary to conventional beliefs. The marked difference between country influences on bank loan and corporate debt spreads is not due to selection effects in bond issuing firms but owes directly to the nature of market finance. JEL Classification: E44, E52, E58, G12, G23