Regulatory pressure and fire sales in the corporate bond market

Andrew Ellul, Chotibhak Jotikasthira and Christian Lundblad

Journal of Financial Economics, 2011, vol. 101, issue 3, 596-620

Abstract: This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. As insurance companies hold over one-third of investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties. Using insurance company transaction data, we find that insurance companies that are relatively more constrained by regulation are more likely to sell downgraded bonds. Bonds subject to a high probability of regulatory-induced selling exhibit price declines and subsequent reversals. These price effects appear larger during periods when the insurance industry is relatively distressed and other potential buyers' carpital is scarce.

Keywords: Fire; sales; Regulation; Price; pressure; Liquidity; Corporate; bonds; Insurance; companies (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (248)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:101:y:2011:i:3:p:596-620

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