DP10537 Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads

Author(s): Massimo Massa, Lei Zhang
Publication Date: April 2015
Keyword(s): bank credit tightening, bond yield spreads, debt and equity correlation, debt inflexibility, lending standards
JEL(s): G12, G21, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10537

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.