Stocks, Bonds and Debt Imbalance: The Role of Relative Availability of Bond and Bank Financing

63 Pages Posted: 15 Jan 2009

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Lei Zhang

University of Queensland - Business School

Date Written: January 14, 2009


We study how the relative availability of bond and bank financing supply affects the firm's ability to use its leverage to buffer shocks, impacting the firm's stock and bond returns. We define a measure that proxies for the regional imbalance in the availability of bank and bond financing. We call this measure Debt "Imbalance". It proxies for a particular type of financial constraint that is more related to the local capital market to which the firm belongs, than to the characteristics of the firm itself. We show that Imbalance tilts the financial structure towards equity, increasing SEOs and lowering leverage. Firms characterized by higher debt imbalance also act as more financially constrained. Higher imbalance increases the sensitivity of cash holdings to cash flows, reduces dividend payment and makes the firm more likely to pay equity in mergers and acquisitions. This has important price implications. Imbalance, by constraining the investment of the firm, keeps the firm's Q above its marginal value and induces the firm to select higher value investments. Firms characterized by higher Imbalance have higher stock beta and idiosyncratic volatility. However, Imbalance is not a separate source of uncertainty, but merely increases the sensitivity of the firm's stock to market and idiosyncratic shocks. The bonds of firms characterized by higher Imbalance are more subject to Treasury yield shocks. The higher the Imbalance, the more a market shock will impact the bond yield and credit spread of the firm. A natural experiment confirms our story: the downgrade of GM and Ford bonds in 2005. We show that the contagion effect of the downgrade has affected more severly the bonds that are characterized by higher Imbalance.

Suggested Citation

Massa, Massimo and Zhang, Lei, Stocks, Bonds and Debt Imbalance: The Role of Relative Availability of Bond and Bank Financing (January 14, 2009). Available at SSRN: or

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
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+33 1 6072 4045 (Fax)

Lei Zhang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072

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