Debt Composition and Lax Screening in the Corporate Bond Market

Corporate bond markets may suffer from investors’ lack of competence in screening out low-quality issuers. We use data from the Israeli capital market in 1999-2009 to investigate the quality of corporate bond issuers and the role of the institutional investors in the screening process in the corporate bond market. The findings suggest that higher quality firms were more likely to issue bonds, but firms of lower quality tended to raise a higher fraction of their debt through bond issuance. Firms with higher proportion of their debt in bonds out had also a higher tendency to default. Institutional investors intensively funded firms with higher share of bonds in their long-term debt despite their lower quality, and therefore were partially responsible for the lax screening in the corporate bond market.

Keywords: Corporate Bonds, Debt Composition, Credit Rating, Emerging Market, Institutional Investors

JEL Classification: G23, G24, G32

Suggested Citation: Suggested Citation

Benzion, Uri and Galil, Koresh and Lahav, Eyal and Shapir, Offer, Debt Composition and Lax Screening in the Corporate Bond Market (October 1, 2017). International Review of Economics & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2922965 or http://dx.doi.org/10.2139/ssrn.2922965