The Effects of Financing Frictions in Investment-Grade Debt Markets

53 Pages Posted: 13 Nov 2017 Last revised: 15 Jan 2024

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami - Department of Finance

Andrew MacKinlay

Virginia Tech

Date Written: July 27, 2020

Abstract

We show that investors reach for yield by taking more duration risk along with more credit risk. The two types of risk-taking behavior have opposite effects on borrowing firms. Higher credit risk-taking increases credit supply to riskier firms. Higher duration risk-taking by investors pushes firms to extend issuance maturity and pay higher interest rates to obtain capital. These firms reduce borrowing and investment as a result. The underlying mechanism is the presence of supply-side frictions in investment-grade corporate debt markets. The results suggest that policymakers should take investor risk choice into account when evaluating the stimulative benefits of low interest rates.

Keywords: Reaching for yield, Financing frictions, Debt maturity.

JEL Classification: G21, G23, G32.

Suggested Citation

Chakraborty, Indraneel and MacKinlay, Andrew, The Effects of Financing Frictions in Investment-Grade Debt Markets (July 27, 2020). University of Miami Business School Research Paper No. 18-11, Available at SSRN: https://ssrn.com/abstract=3069076 or http://dx.doi.org/10.2139/ssrn.3069076

Indraneel Chakraborty (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Andrew MacKinlay

Virginia Tech ( email )

1016 Pamplin Hall (0221)
880 West Campus Drive
Blacksburg, VA 24060-0221
United States

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