Is Public Debt Arm's Length? Evidence from Corporate Bond Purchases of Life Insurance Companies

Abstract

Although corporate bonds are conventionally viewed as arm’s-length financing, we document features consistent with relationship lending between issuers and life insurers, the largest institutional bond investors. A life insurer purchases a larger share of a new bond issue when it already holds a larger share of the issuer’s outstanding bonds. This familiarity-based lending intensifies with prior insurer-issuer engagement and is stronger in private placements, a market under recent regulatory scrutiny, where information and relationships are more valuable. Insurers profit more from familiarity-based lending, particularly with opaque issues. Familiar issuers benefit during downturns, as reflected in higher bond and stock returns.

Keywords: Corporate bonds, insurance companies, arm's length lending, relationship lending, asset pricing

JEL Classification: G12, G20, G23, G30