Moral Hazard, Bank Monitoring, and Bond Spreads
42 Pages Posted: 19 Oct 2018
Date Written: July 23, 2018
We test the hypothesis that bank monitoring causes lower yields on public bonds. We find that firms with a banking relationship have 15 basis points lower yield spreads on their public debt, similar in magnitude to a two-notch rating upgrade, or a standard deviation increase in profitability. The effect of a banking relationship is larger for firms with a dispersed bond ownership, junk debt, and no credit default swaps. Our results are robust to IV estimation and a quasi-natural experiment. In the market for information production, it appears that bank monitoring cross-subsidizes credit risk, directly benefiting bondholders.
Keywords: Bank Monitoring, Security Prices, Corporate Debt, Bond Yields, CDS Spreads, Cross-Monitoring, eMAXX, Trace
JEL Classification: G21, G23, G34
Suggested Citation: Suggested Citation