Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels

Viral V. Acharya, Ryan Banerjee, Matteo Crosignani, Tim Eisert and Renée Spigt

Journal of Financial Economics, 2025, vol. 170, issue C

Abstract: We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels — risky firms just above the IG cutoff — enjoyed subsidized bond financing in 2009–19. This effect is driven by Fed purchases of securities inducing long-duration IG-focused investors to rebalance their portfolios towards higher-yielding IG bonds. The benefiting firms (i) exploited the sluggish downward adjustment of credit ratings after M&A to finance risky acquisitions with bond issuances, and (ii) increased market share affecting competitors’ employment and investment, but (iii) suffered severe downgrades at the onset of the pandemic.

Keywords: Capital misallocation; Corporate bond market; Investment-grade bonds; BBB rating; Large-scale asset purchases (LSAP); Credit ratings (search for similar items in EconPapers)
JEL-codes: G23 G24 G34 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:170:y:2025:i:c:s0304405x25000923

DOI: 10.1016/j.jfineco.2025.104084

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