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 Centre for Economic Policy Research

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
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP17032 (application/pdf)

Related works:
Journal Article: Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels (2025)
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)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:17032

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP17032

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().