Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads
53 Pages Posted: 5 Sep 2014
Date Written: July 1, 2014
We study how debt market frictions that constrain the ability of firms to buffer a tightening in bank credit supply affect corporate yield spreads. We focus on the frictions driven by the regional availability of debt financing. We provide evidence of a strong regional segmentation in the debt market, and build a measure of debt inflexibility that captures the inability to replace bank loans with corporate bonds. We document that more inflexible firms suffer a bigger increase in yield spreads as bank credit tightens. The impact is stronger among smaller firms, lower rated firms, and firms relying more on bank debt. Further, more inflexible firms display a stronger link between yield spreads and cash flow volatility, a stronger link between yield spreads and stock volatility (Campbell and Taksler, 2003) as well as a closer connection between changes in yield spreads and stock returns.
Keywords: bank credit tightening, debt inflexibility, lending standards, bond yield spreads, debt and equity correlation
JEL Classification: G12, G21, G23
Suggested Citation: Suggested Citation