The magnitude and Cyclical Behavior of Financial Market Frictions

Table 1

Summary Statistics

Variable                    Minimum Median Maximum

Panel Dimensions

Observations = 14, 124 Firms = 918

Min. Tenure = 4 Median Tenure = 14 Max. Tenure = 27

Notes: Sample period: 1997Q1-2003Q3. In every period, the sample excludes firms
with leverage ratios below the 2.5^th percentile and above the 97.5^th percentile, firms with
credit spreads above the 97.5^th percentile, and firms with EDFs at exactly 20%. Sales
and market capitalization are in real chain-weighted dollars.

^aThe book value of long-term debt relative to market capitalization.

^b Adjusted for the differential tax treatment of corporate and Treasury securities.
^cThe book value of traded bonds relative to the book value of total long-term debt.

Although firms in our sample generally have only a few bond issues trading at any
given point in time, this publicly-traded debt represents a significant portion of their
long-term debt. The median ratio of the book value of traded bonds outstanding
to the book value of total long-term debt on firms’ balance sheet is about one-half,
suggesting that market prices on outstanding securities likely provide an accurate
gauge of the marginal cost of external finance for most of the firms. Our sample also
spans essentially the entire corporate credit quality spectrum—from C2, the “junkiest
junk,” to AAA, the highest grade. In terms of credit quality, the median observation
is at the bottom rung of the investment-grade ladder, and it is associated with a tax-
adjusted spread of 227 basis points over the risk-free rate and an expected year-ahead
default frequency of 55 basis points.

Our sample includes only 918 nonfinancial corporations. Nonetheless, it is repre-
sentative of the aggregate economy along a number of dimensions. The upper panel
of Figure 4 compares the aggregate growth rate of real sales for the firms in our panel

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