Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads

Massimo Massa and Lei Zhang

No 10537, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study how debt market frictions constraining the ability to replace bank with bond financing during a tightening in bank credit supply affect corporate yield spreads. We document that more inflexible firms suffer bigger increases in bond yield spreads as bank credit supply tightens. Debt inflexibility also amplifies the impact of firm-specific tightening in bank credit availability induced by the violation of loan covenants. More inflexible firms display a stronger link between yield spreads and cash flow volatility, a stronger link between yield spreads and stock volatility and a closer correlation between changes in yield spreads and stock returns.

Keywords: Bank credit tightening; Bond yield spreads; Debt and equity correlation; Debt inflexibility; Lending standards (search for similar items in EconPapers)
JEL-codes: G12 G21 G23 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-ban
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