Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads

53 Pages Posted: 5 Sep 2014

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Lei Zhang

University of Queensland - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2014

Abstract

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

Massa, Massimo and Zhang, Lei, Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads (July 1, 2014). Available at SSRN: https://ssrn.com/abstract=2491136 or http://dx.doi.org/10.2139/ssrn.2491136

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Lei Zhang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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