Bond Funds and Credit Risk

81 Pages Posted: 25 Nov 2019 Last revised: 31 Mar 2022

See all articles by Jaewon Choi

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance; Yonsei University - School of Business

Amil Dasgupta

London School of Economics (LSE); European Corporate Governance Institute (ECGI)

Ji Yeol Jimmy Oh

Hanyang University

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2022

Abstract

We show that supply-side effects arising from the bond holdings of open-end mutual funds affect corporate credit risk. In our model, funds exposed to flow-performance relationships are reluctant to roll over bonds of companies with weak cash flow prospects fearing future outflows. This lowers rollover prices, enhancing equityholders’ strategic default incentives, engendering a positive association between bond funds’ presence and credit risk. Empirically, we find that in firms with weak cash flow prospects, fund holding shares increase CDS spreads, and more so when flows are more sensitive to performance. We use instrumental variables and quasi-experiments to address endogeneity concerns.

Keywords: Fund flows, credit risk, flow concerns, bond rollover, default-liquidity loop

JEL Classification: G23, G32

Suggested Citation

Choi, Jaewon and Dasgupta, Amil and Oh, Ji Yeol Jimmy, Bond Funds and Credit Risk (March 28, 2022). European Corporate Governance Institute – Finance Working Paper No. 639/2019, Available at SSRN: https://ssrn.com/abstract=3490683 or http://dx.doi.org/10.2139/ssrn.3490683

Jaewon Choi

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
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HOME PAGE: http://https://sites.google.com/site/jaewchoi1203

Yonsei University - School of Business ( email )

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Amil Dasgupta (Contact Author)

London School of Economics (LSE) ( email )

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Ji Yeol Jimmy Oh

Hanyang University ( email )

School of Business #513
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Seoul, Seoul 04763
Korea, Republic of (South Korea)
+82222202689 (Phone)

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