Debt Issuance and Asset Revaluation: Firm Heterogeneity, Monetary Easing, and Implications on Investment

Abstract

This thesis investigates the association between debt issuance and asset revaluation, focusing on variations across firm characteristics and monetary regimes, as well as its implications for investment. The thesis is composed of three chapters, each addressing one of the critical aspects above.

The first chapter establishes the relation between debt issuance and asset revaluation, with the latter defined as value appreciation for firm stakeholders beyond changes in debt notional, and explores how this relation varies across different types of firms. Using quarterly data from over 7,000 public US non-financial firms spanning 1975 to 2023, we find that active debt management is strongly correlated with value creation. Less established firms---characterized as younger, higher-market-to-book, smaller, lower-leverage, higher-cash, or less profitable---experience stronger effects compared to their counterparts. The value impacts are predominantly accrued to stock price appreciation and net equity issuance.

The second chapter analyzes the effect of accommodative monetary policy on how changes in debt levels relate to asset revaluation. We find that active debt management is correlated with stock price appreciation primarily during moderate low-rate periods, while net debt issuance signals increased net equity issuance under broader accommodative monetary conditions. In the cross section, most firm types experience reinforced equity financing under monetary easing, while only younger, value, or smaller firms derive greater stock market benefits from moderate periods of low borrowing costs.

The third chapter explores the link between debt issuance and firm investment, demonstrating a strong association between net debt issuance and increased investment activities. Less established firms tend to allocate debt toward net capital expenditure and R&D, whereas more established firms use it for acquisition. The relation between net debt issuance and investment is amplified by low interest rates, emphasizing the role of accommodative monetary policy in fostering business investment.

Together, this thesis provides a deeper understanding of how debt financing relates to firm value creation and offers important insights for corporate finance strategies and policymaking.