The Corporate Supply of (Quasi) Safe Assets

79 Pages Posted: 6 Mar 2021 Last revised: 9 Sep 2023

See all articles by Lira Mota

Lira Mota

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: September 8, 2023

Abstract

Investors value safety services in financial assets, such as the ability to serve as a store of value, to serve as collateral, or to meet mandatory capital and liquidity requirements. I present a model in which investors value safety services not only in traditional safe assets such as US Treasuries, but also in corporate debt. Shareholders thus maximize the value of the firm by complementing standard business operations with safe asset creation. Based on this theoretical framework, I use the CDS-bond basis to derive a measurement of the safety premium of corporate bonds. I document substantial cross sectional variation in the safety premium of corporate bonds, which allows me to test the model's predictions. I show that a high safety premium leads to a marked increase in debt issuance by relatively safer firms. These debt proceeds have a small impact on real investment and are largely used instead for equity payouts. This mechanism can explain why, in the aftermath of the financial crisis, non-financial investment grade companies significantly increased their debt issuance and equity payout while investment remained weak.

Keywords: Safe assets, Corporate Bonds, CDS, Safety Premium

JEL Classification: G10, G11, G32

Suggested Citation

Mota, Lira, The Corporate Supply of (Quasi) Safe Assets (September 8, 2023). Available at SSRN: https://ssrn.com/abstract=3732444 or http://dx.doi.org/10.2139/ssrn.3732444

Lira Mota (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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