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Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels

Author

Listed:
  • Viral V Acharya
  • Ryan Niladri
  • Matteo Crosignani
  • Tim Eisert
  • Renée Spigt
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.

Suggested Citation

  • Viral V Acharya & Ryan Niladri & Matteo Crosignani & Tim Eisert & Renée Spigt, 2022. "Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels," BIS Working Papers 1002, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1002
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    References listed on IDEAS

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    Cited by:

    1. Warinthip Worasak & Nuwat Nookhwun & Pongpitch Amatyakul, 2022. "Monetary Policy and Risk-Taking: Evidence from Thai Corporate Bond Markets," PIER Discussion Papers 186, Puey Ungphakorn Institute for Economic Research.
    2. Abidi, Nordine & Falagiarda, Matteo & Miquel-Flores, Ixart, 2023. "Quantitative easing and credit rating agencies," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Marco Pagano & Josef Zechner, 2022. "COVID-19 and Corporate Finance [The risk of being a fallen angel and the corporate dash for cash in the midst of COVID]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(4), pages 849-879.
    4. Patrick Aldridge & David Cimon & Rishi Vala, 2023. "Central Bank Crisis Interventions: A Review of the Recent Literature on Potential Costs," Discussion Papers 2023-30, Bank of Canada.

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    More about this item

    Keywords

    corporate bond market; investment-grade bonds; large-scale asset purchases (LSAP); credit ratings; credit ratings inflation.;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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