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.