Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels

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

No 17032, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 prolonged cumulative 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, (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 inflation (search for similar items in EconPapers)
JEL-codes: E31 E44 G21 (search for similar items in EconPapers)
Date: 2022-06
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Related works:
Working Paper: Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels (2022)
Working Paper: Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels (2022)
Working Paper: Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels (2022)
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