Template-Type: ReDIF-Paper 1.0
Author-Name: Viral V Acharya
Author-X-Name-First: Viral V 
Author-X-Name-Last: Acharya 
Author-Name: Ryan Niladri 
Author-X-Name-First: Ryan Niladri
Author-X-Name-Last: Banerjee
Author-Name: Matteo Crosignani
Author-X-Name-First: Matteo 
Author-X-Name-Last: Crosignani
Author-Name: Tim Eisert
Author-X-Name-First: Tim 
Author-X-Name-Last: Eisert
Author-Name: Renée Spigt
Author-X-Name-First: Renée 
Author-X-Name-Last: Spigt
Title: Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels
Abstract: We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels – risky firms just above the IG rating cutoff – enjoyed subsidised bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The benefiting firms used this privilege to fund risky acquisitions and increase market share, exploiting the reluctance of credit rating agencies to downgrade post-M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.
Length: 77 pages
Creation-Date: 2022-02
File-URL: https://www.bis.org/publ/work1002.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1002.htm
File-Format: text/html
Number: 1002
Keywords: corporate bond market, investment-grade bonds, large-scale asset purchases (LSAP), credit ratings, credit ratings inflation.
Classification-JEL: E31, E44, G21.
Handle: RePEc:bis:biswps:1002