Nonfinancial Firms as Cross-Market Arbitrageurs

I demonstrate that nonfinancial corporations act as cross-market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross-market corporate arbitrage is most prevalent among large, unconstrained firms, and helps account for aggregate financing patterns.