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Termin: 20.04.2021 Uhrzeit: 11:00 - 12:30 ( Dienstag )

Tim Eisert - Erasmus University Rotterdam


Date: April 20th, 11:00 am

Title: Exorbitant Privilege? The Bond Market Subsidy of Prospective Fallen Angels

We document that risky firms just above the investment-grade cutoff, which face the prospect of becoming ``fallen angels'' upon a downgrade, enjoy an exorbitant privilege in borrowing costs. In particular, these firms have benefited from investors subsidizing their bond financing costs since the Global Financial Crisis, especially during periods of monetary easing. We document two important consequences of the investor demand for
bonds issued by prospective fallen angels. First, the subsidized firms grow disproportionately large and increase their market share by reducing the markup on their products. Second, the resulting spillover effects force their competitors to reduce employment, investment, markups, and sales growth. The pace of downgrades to fallen angels in the aftermath of the pandemic, rapid even when compared with the Global Financial Crisis, highlighted their vulnerability, as also evidenced in the Federal Reserve extending its backstop to bonds issued by these firms in April 2020.

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Veranstalter: Finance Group