Macro Finance II
Sunday, Jan. 9, 2022 12:15 PM - 2:15 PM (EST)
- Chair: Janice C. Eberly, Northwestern University
Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels
AbstractWe document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels -- risky firms just above the IG rating cutoff -- enjoyed subsidized bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The beneting firms used this privilege to fund risky acquisitions and increase market share, exploiting the reluctance of credit rating agencies to downgrade post-M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.
The Rise of Bond Financing in Europe
AbstractIn the Euro Area, the share of corporate borrowing coming from bond markets doubled since 2000 at the expense of bank lending. We use micro-level evidence from European firms to dissect this aggregate growth and highlight potential risks behind the expansion, some of which came to light in spring 2020. First, the composition of bond issuers has shifted towards riskier firms: a stream of firms entered the bond market for the first time while being significantly smaller, more levered and less profitable than historical issuers. Second, entering the bond market implies a trade-off between growth and risk: new issuers borrowed to invest and grow, but at the cost of higher leverage and interest rates. Moreover, the majority of firms facing a credit rating downgrade in the 2020 crisis were small private firms that entered the bond market after 2012. In light of the recent turmoil, our findings support broadening lender-of-last resort policies to include the corporate bond market.
Corporate Loan Spreads and Economic Activity
AbstractWe use secondary corporate loan-market prices to construct a novel loan-market-based credit spread. This measure has considerable predictive power for economic activity across macroeconomic outcomes in both the U.S. and Europe and captures unique information not contained in public market credit spreads. Loan-market borrowers are compositionally different and particularly sensitive to supply-side frictions as well as financial frictions that emanate from their own balance sheets. This evidence highlights the joint role of financial intermediary and borrower balance-sheet frictions in understanding macroeconomic developments and enriches our understanding of which type of financial frictions matter for the economy.
- G1 - Asset Markets and Pricing