Working Paper: CEPR ID: DP17426
Authors: Viral Acharya; Deniz Anginer; A. Joseph Warburton
Abstract: Using unsecured bonds traded in the U.S. from 1990 to 2020, we examine the sensitivity of credit spreads to changes in firm risk. In the time period preceding the implementation of the Dodd-Frank Act, we find that credit spreads were less sensitive to risk for large financial firms compared to small financial firms and compared to large non-financial firms. This lack of spread-risk sensitivity is consistent with investors expecting government guarantees on unsecured debt of large financial firms. In the post-Dodd Frank period after 2012, we do not observe differences in this sensitivity by firm size. These results are consistent with a strengthening of market discipline in the aftermath of the policy reforms implemented following the financial crisis.
Keywords: Too Big to Fail; Dodd-Frank; Bailout; Implicit Guarantee; Moral Hazard
JEL Codes: G21; G24; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government guarantees (H81) | credit spread sensitivity (E43) |
| credit spreads (G12) | firm risk (G32) |
| credit spread sensitivity for large financial firms (G32) | market discipline (G18) |
| firm size (L25) | credit spread sensitivity (E43) |
| risk measures (G32) | credit spreads (G12) |
| Dodd-Frank Act (G28) | credit spread sensitivity for large financial firms (G32) |