Bond funds and credit risk

Jaewon Choi, Amil Dasgupta and Ji Oh

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We show that supply-side effects arising from the bond holdings of open-end mutual funds affect corporate credit risk. In our model, funds exposed to flow-performance relationships are reluctant to roll over bonds of companies with weak cash flow prospects fearing future outflows. This lowers rollover prices, enhancing equityholders' strategic default incentives, engendering a positive association between bond funds' presence and credit risk. Empirically, we find that in firms with weak cash flow prospects, fund holding shares increase CDS spreads, and more so when flows are more sensitive to performance. We use instrumental variables and quasi-experiments to address endogeneity concerns.

Keywords: fund flows; credit risk; flow concerns; bond rollover; default-liquidity loop (search for similar items in EconPapers)
JEL-codes: G23 G32 (search for similar items in EconPapers)
Pages: 73 pages
Date: 2022-05-16
New Economics Papers: this item is included in nep-cfn and nep-fmk
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http://eprints.lse.ac.uk/118856/ Open access version. (application/pdf)

Related works:
Working Paper: Bond Funds and Credit Risk (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:118856

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