Market Discipline in the Direct Lending Space

86 Pages Posted: 22 Jan 2021 Last revised: 4 Apr 2022

See all articles by Tetiana Davydiuk

Tetiana Davydiuk

Carnegie Mellon University - David A. Tepper School of Business

Tatyana Marchuk

BI Norwegian Business School

Samuel Rosen

Temple University, Fox School of Business

Date Written: November 12, 2020

Abstract

Using the exclusion of business development companies (BDCs) from stock indexes, this paper studies the efficacy of market discipline in the direct lending space. Amid share sell-offs by institutional investors, a drop in valuations limits the ability of affected BDCs to raise new capital and sustain their investment activity. Due to market discipline, affected BDCs reduce the risk exposure of their portfolios by shifting towards senior debt. The contraction in BDC credit hampers employment growth of their portfolio companies. The certification channel allows affected borrowers to partially offset this effect by diversifying across lenders and securing funding from new BDCs.

Keywords: business development companies, nonbank lending, market discipline, index exclusion, capital supply shock, real effects

JEL Classification: G20, G23, G28

Suggested Citation

Davydiuk, Tetiana and Marchuk, Tatyana and Rosen, Samuel, Market Discipline in the Direct Lending Space (November 12, 2020). Available at SSRN: https://ssrn.com/abstract=3729530 or http://dx.doi.org/10.2139/ssrn.3729530

Tetiana Davydiuk

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Tatyana Marchuk (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Samuel Rosen

Temple University, Fox School of Business ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

HOME PAGE: http://sites.google.com/view/samuel-rosen/

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