Regulatory Pressure and Fire Sales in the Corporate Bond Market
Indiana University - Kelley School of Business - Department of Finance
Southern Methodist University (SMU) - Edwin L. Cox School of Business; University of North Carolina Kenan-Flagler Business School
Christian T. Lundblad
University of North Carolina Kenan-Flagler Business School
February 28, 2011
Journal of Financial Economics (JFE), Vol. 101, No. 3, 2011
This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. As insurance companies hold over one-third of investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties. Using insurance company transaction data, we find that insurance companies that are relatively more constrained by regulation are more likely to sell downgraded bonds. Bonds subject to a high probability of regulatory-induced selling exhibit price declines and subsequent reversals. These price effects appear larger during periods when the insurance industry is relatively distressed and other potential buyers’ capital is scarce.
Number of Pages in PDF File: 54
Keywords: Fire sales, Regulation, Price pressure, Liquidity, Corporate bonds, Insurance companies
JEL Classification: G11, G12, G14, G18, G22
Date posted: March 22, 2009 ; Last revised: May 12, 2014
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