Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads

56 Pages Posted: 13 Apr 2015

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Lei Zhang

Antai College of Economics and Management, Shanghai Jiao Tong University

Multiple version iconThere are 2 versions of this paper

Date Written: April 2015

Abstract

We study how debt market frictions constraining the ability to replace bank with bond financing during a tightening in bank credit supply affect corporate yield spreads. We document that more inflexible firms suffer bigger increases in bond yield spreads as bank credit supply tightens. Debt inflexibility also amplifies the impact of firm-specific tightening in bank credit availability induced by the violation of loan covenants. More inflexible firms display a stronger link between yield spreads and cash flow volatility, a stronger link between yield spreads and stock volatility and a closer correlation between changes in yield spreads and stock returns.

Keywords: bank credit tightening, bond yield spreads, debt and equity correlation, debt inflexibility, lending standards

JEL Classification: G12, G21, G23

Suggested Citation

Massa, Massimo and Zhang, Lei, Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads (April 2015). CEPR Discussion Paper No. DP10537. Available at SSRN: https://ssrn.com/abstract=2593820

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

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Lei Zhang

Antai College of Economics and Management, Shanghai Jiao Tong University ( email )

HOME PAGE: http://sites.google.com/site/zlei89/

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