We analyze why firms use non-intermediated short-term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start-up financing for capital investment. Firms’ CP issuance activity is driven by a desire to minimize transactions costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. We find that CP is often refinanced with long-term bond issuance to reduce rollover risk.
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