Non-Financial Firms as Cross-Market Arbitrageurs
90 Pages Posted: 19 Nov 2015 Last revised: 8 Oct 2018
Date Written: October 3, 2018
Abstract
I demonstrate that non-financial corporations act as cross-market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively-correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross-market corporate arbitrage is most prevalent among large, unconstrained firms, and helps to account for aggregate financing patterns.
Keywords: Non-financial firms; Cross-market corporate arbitrage; Capital market-driven corporate finance
JEL Classification: G32, G02, G10
Suggested Citation: Suggested Citation