Working Paper: CEPR ID: DP10537
Authors: Massimo Massa; Lei Zhang
Abstract: We study how debt market frictions constraining the ability to replace bank with bond financing during a tightening in bank credit supply affect corporate yield spreads. We document that more inflexible firms suffer bigger increases in bond yield spreads as bank credit supply tightens. Debt inflexibility also amplifies the impact of firm-specific tightening in bank credit availability induced by the violation of loan covenants. More inflexible firms display a stronger link between yield spreads and cash flow volatility, a stronger link between yield spreads and stock volatility and a closer correlation between changes in yield spreads and stock returns.
Keywords: bank credit tightening; bond yield spreads; debt and equity correlation; debt inflexibility; lending standards
JEL Codes: G12; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tightening in bank credit supply (E51) | increase in corporate yield spreads (G39) |
| debt inflexibility (H63) | increase in sensitivity of yield spreads (E43) |
| tightening in bank credit supply + debt inflexibility (G21) | increase in corporate yield spreads (G39) |
| violation of loan covenants (G33) | increase in yield spreads (E43) |
| cash flow volatility (G19) | increase in yield spreads (E43) |