Market Discipline in the Direct Lending Space

113 Pages Posted: 22 Jan 2021 Last revised: 6 Sep 2023

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 effectiveness of market discipline in the direct lending space. Amid share sell-offs by institutional investors, a drop in BDCs' valuations limits their ability to raise new equity capital. Following this funding shock, BDCs do not adjust their capital structure while reducing the risk exposure of their portfolios. We document a greater reduction in risk for BDCs subject to stronger market discipline from their debtholders. BDCs pass through the capital shock to their portfolio firms by reducing their investment intensity.

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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