Bank Loans and Bond Prices

40 Pages Posted: 19 Oct 2018 Last revised: 6 Apr 2020

See all articles by James Weston

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Emmanuel Yimfor

University of Michigan, Stephen M. Ross School of Business

Date Written: July 23, 2018

Abstract

We test whether bank loans change public bond yields. A 10% increase in bank debt raises bond yields by 15bps, reflecting a trade-off between the benefits of bank cross-monitoring and higher bond risk. This effect is smaller for firms with no CDS and junk debt, where bank monitoring is most valuable. It is unlikely that firms with bank debt are riskier because they are less likely to be downgraded and have lower loan spreads. We find similar results using a natural experiment around the 2014 oil shock. Our results highlight how bond yields depend on incentive conflicts among creditors.

Keywords: Banking Relationships, Bank Loans, Corporate Debt, Yield Spreads, Bank Cross-Monitoring, Debt Structure

JEL Classification: G20, G24, G29, G30, G33

Suggested Citation

Weston, James Peter and Yimfor, Emmanuel, Bank Loans and Bond Prices (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

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States

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