Research

Using French firm data, we show that corporate debt structure plays a significant role in monetary policy transmission. In addition to interest rate policy, we analyse the impact of a novel ECB-induced sovereign spread shock, related to credit risk and liquidity, and show that both types of policy tightening diminish French firms’ investment. The transmission of conventional shocks is stronger for firms with higher shares of bank debt, but contractionary bond spread shocks lower investment more for firms with higher shares of bond debt. Bond liquidity and credit risk tightening leads to higher bond-bank loan interest rate spreads and lower bond issuance.

This study provides new causal evidence on the firm-level effects of reducing free emission permits in emission trading systems. Using a difference-in-differences design, we exploit a reform that altered an eligibility threshold for free permit allocation. Receiving fewer free permits reduced emissions by more than 14 percent relative to firms that retained them. This reduction was accompanied by similar declines in revenue, employment, and assets. We develop a multi-product general equilibrium model that explains these patterns through a novel mechanism linking permit allocation to firms’ decisions. Firms that receive fewer free emission permits terminate their least productive product lines, increasing the market share of the remaining ones. Higher expected profits then encourage earlier adoption of an efficiency-improving technology.