Bank loans and bond prices

James Weston and Emmanuel Yimfor

Journal of Corporate Finance, 2023, vol. 80, issue C

Abstract: We test whether bank loans change public bond yields. A 25% increase in bank debt raises bond yields by 8 bps, reflecting a trade-off between the benefits of bank cross-monitoring and higher bond risk. This effect is smaller for firms with no credit default swaps (CDSs) and with junk debt—scenarios where bank monitoring is most valuable. It is unlikely that firms with bank debt are riskier, because they are less likely to be downgraded and have lower loan spreads. We find similar results using a natural experiment around the 2014 oil shock. Our results highlight how bond yields depend on incentive conflicts among creditors.

Keywords: Banking relationships; Bank loans; Corporate debt; Yield spreads; Bank cross-monitoring; Debt structure (search for similar items in EconPapers)
JEL-codes: G20 G24 G29 G30 G33 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:80:y:2023:i:c:s092911992300055x

DOI: 10.1016/j.jcorpfin.2023.102406

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