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

Viral Acharya (), Ryan Niladri Banerjee, Matteo Crosignani (), Tim Eisert and Renée Spigt

No 1002, BIS Working Papers from Bank for International Settlements

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 rating cutoff – enjoyed subsidised bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The benefiting firms used this privilege to fund risky acquisitions and increase market share, exploiting the reluctance of credit rating agencies to downgrade post-M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.

Keywords: corporate bond market; investment-grade bonds; large-scale asset purchases (LSAP); credit ratings; credit ratings inflation. (search for similar items in EconPapers)
JEL-codes: E31 E44 G21 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2022-02
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
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Related works:
Working Paper: Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels (2022) Downloads
Working Paper: Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels (2022) Downloads
Working Paper: Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels (2022) Downloads
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