Moral Hazard, Bank Monitoring, and Bond Spreads

42 Pages Posted: 19 Oct 2018

See all articles by James Weston

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Emmanuel Yimfor

Rice University - Jesse H. Jones Graduate School of Business

Date Written: July 23, 2018

Abstract

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

Weston, James Peter and Yimfor, Emmanuel, Moral Hazard, Bank Monitoring, and Bond Spreads (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=3254902 or http://dx.doi.org/10.2139/ssrn.3254902

James Peter Weston (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

Emmanuel Yimfor

Rice University - Jesse H. Jones Graduate School of Business ( email )

Houston, TX
United States

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