Low-grade bonds: a growing source of corporate funding
Over-the-Counter Market Liquidity and Securities Lending
This paper studies how over-the-counter market liquidity is affected by securities lending. We combine micro-data on corporate bond market trades with securities lending transactions and individual corporate bond holdings by U.S. insurance companies. Applying a difference-in-differences empirical strategy, we show that the shutdown of AIG's securities lending program in 2008 caused a statistically and economically significant reduction in the market liquidity of corporate bonds predominantly held by AIG. We also show that an important mechanism behind the decrease in corporate bond liquidity ...
Financial contracting and the choice between private placement and publicly offered bonds
Private placement bonds have unique financial contracting in controlling borrower-lender agency conflicts due to direct monitoring and the relative ease of future renegotiation. Our data show that private placements are more likely to have restrictive covenants and are more likely to be issued by smaller and riskier borrowers. We find the determinants of bond yield spreads to be quite different between private placements and public issues, reflecting the different institutional arrangements between the two markets. Finally, in issuing bonds, we find that firms self-select the bond type to ...
The slope of the credit yield curve for speculative-grade issuers
Many theoretical bond pricing models predict that the slope of the credit yield curve facing highly leveraged firms is negative. Previous empirical research by Sarig and Warga (1989) and Fons (1994) confirms this view of high yield bonds. We show that these results largely owe to sample selection bias associated with the debt maturity choice. When the credit quality of the issuer is held constant, as in the case of matched bond samples, the typical credit yield curve facing speculative-grade issuers is upward-sloping.
Multiple ratings and credit standards: differences of opinion in the credit rating industry
This paper tests whether the tendency of third rating agencies to assign higher ratings than Moody's and Standard & Poor's results from more lenient standards or sample selection bias. More lenient standards might result from incentives to satisfy issuers who are, in fact, the purchasers of the ratings. Selection bias might be important because issuers that expect a low rating from a third agency are unlikely to request one. Our analysis of a broad sample of corporate bond ratings at year-end 1993 reveals that, although sample selection bias appears important, it explains less than half the ...