Market Discipline in the Direct Lending Space

Tetiana Davydiuk, Tatyana Marchuk and Samuel Rosen

The Review of Financial Studies, 2024, vol. 37, issue 4, 1190-1264

Abstract: Using the exclusion of business development companies (BDCs) from stock indexes, this paper studies the effectiveness of market discipline in the direct lending space. Amid share sell-offs by institutional investors, a drop in BDCs’ valuations limits their ability to raise new equity capital. Following this funding shock, BDCs do not adjust their capital structure. At the same time, they are reducing the risk exposure of their portfolios. We document a greater reduction in risk for BDCs subject to stronger market discipline from their debtholders. BDCs pass through the capital shock to their portfolio firms by reducing their investment intensity.

Keywords: G23; G32 (search for similar items in EconPapers)
Date: 2024
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