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Bank credit tightening, debt market frictions, and corporate yield spreads

Massimo Massa and Lei Zhang

Journal of Financial Markets, 2021, vol. 55, issue C

Abstract: We study how credit supply frictions in the regional availability of debt financing in the U.S. affect corporate yield spreads. We define a measure of debt inflexibility that captures the firm’s inability to buffer a tightening in bank credit by replacing bank loans with corporate bonds. We document that more inflexible firms suffer a higher increase in yield spreads as bank credit tightens. This happens for both market-wide tightening in lending standards and firm-specific tightening upon loan covenant violations. Moreover, inflexible firms display a closer connection between changes in yield spreads and stock returns.

Keywords: Bank credit tightening; Debt inflexibility; Lending standards; Yield spreads (search for similar items in EconPapers)
JEL-codes: G12 G21 G23 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.finmar.2020.100603

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Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

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