Regulatory Pressure and Fire Sales in the Corporate Bond Market

54 Pages Posted: 22 Mar 2009 Last revised: 12 May 2014

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); University of Salerno - Centre for Studies in Economics and Finance (CSEF); European Corporate Governance Institute (ECGI)

Chotibhak Jotikasthira

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2011

Abstract

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.

Keywords: Fire sales, Regulation, Price pressure, Liquidity, Corporate bonds, Insurance companies

JEL Classification: G11, G12, G14, G18, G22

Suggested Citation

Ellul, Andrew and Jotikasthira, Chotibhak and Lundblad, Christian T., Regulatory Pressure and Fire Sales in the Corporate Bond Market (February 28, 2011). Journal of Financial Economics (JFE), Vol. 101, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=1362190 or http://dx.doi.org/10.2139/ssrn.1362190

Andrew Ellul

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Chotibhak Jotikasthira (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

University of North Carolina Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599-3490
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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