DP13508 Disruption and Credit Markets

Author(s): Bo Becker, Victoria Ivashina
Publication Date: February 2019
Keyword(s): corporate bonds, default, Disruption
JEL(s): G12, G30, G32
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13508

In the past thirty years, defaults on corporate bonds have been substantially higher than the historical average. We show that this increase in credit risk can be largely attributed to an increase in the rate at which new and fast-growing firms displace incumbents (a phenomenon sometimes referred to as 'disruptive innovation'). Industries with a lager presence of firms newly listed on the stock market, as well as industries that receive funding from venture capital, have a higher loss of revenue market share for established firms and subsequently see a rise in corporate bond defaults. Patent filings by individuals as opposed to corporations also predict defaults. These results are not affected by inclusion of controls for industry exposure to offshore manufacturing.