University of Florida finance professor’s research awarded best paper of the year

Christopher James’ research illuminates how government borrowing impacts corporate financing.

Research by Christopher James, William H. Dial/SunTrust Eminent Scholar at the University of Florida Warrington College of Business, was awarded for its academic superiority as the 2023 Best Paper by the Journal of Financial Intermediation, a leading journal in the field of finance. The best paper award is recognition of, in the opinion of the editors, the most impactful published paper in the past year.

James and his co-authors Cagri Akkoyun of Northwestern University and Nuri Ersahin of Southern Methodist University, sought to understand how government borrowing impacts corporate financing.

While the paper examines the impact of government deficit spending on corporate borrowing during World War I, given the current level of deficit spending (roughly 6.2% of GDP in 2023), there is a keen interest in understanding whether government borrowing crowds out private investment. The unique setting of World War I provided the researchers with a natural experiment that allowed them to isolate the effects of government borrowing on corporate finance from other potential confounding factors.  

Using hand-collected data on corporate bond and stock offerings, the researchers compared the differences in corporate borrowing when the U.S. Treasury was also borrowing to corporate borrowing when the U.S. Treasury was not in the market, James explained.

Overall, James and his co-authors found that government borrowing has a significant negative effect on private sector borrowing and investment. Specifically, when the government issued long-term bonds, it became harder for companies to issues their own long-term bonds, preferred stocks and common stocks that pay stable dividends.

“When the government borrows money by issuing bonds, as they did during WWI through Liberty Bonds, it’s like competing with companies for investors’ money,” James explained. “We show that this makes it harder for companies to raise money in certain ways, especially if they’re offering investments that our research suggests investors see as similar to government bonds.”

While the research findings indicate challenges for corporate long-term bonds and preferred stock, short-term corporate borrowing and stocks that don’t pay regular dividends weren’t impacted by government borrowing.

This award-winning research provides crucial insights into how government borrowing affects corporate finance, with implications that extend far beyond its historical setting of World War I. As governments continue to issue significant debt, James and his co-authors’ work serves as a timely reminder of how public sector financial decisions can profoundly impact private sector funding and investment strategies.