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Bank credit tightening, debt market frictions, and corporate yield spreads

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  • Massa, Massimo
  • Zhang, Lei

Abstract

We study how credit supply frictions in the regional availability of debt financing in the U.S. affect corporate yield spreads. We define a measure of debt inflexibility that captures the firm’s inability to buffer a tightening in bank credit by replacing bank loans with corporate bonds. We document that more inflexible firms suffer a higher increase in yield spreads as bank credit tightens. This happens for both market-wide tightening in lending standards and firm-specific tightening upon loan covenant violations. Moreover, inflexible firms display a closer connection between changes in yield spreads and stock returns.

Suggested Citation

  • Massa, Massimo & Zhang, Lei, 2021. "Bank credit tightening, debt market frictions, and corporate yield spreads," Journal of Financial Markets, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:finmar:v:55:y:2021:i:c:s1386418120300720
    DOI: 10.1016/j.finmar.2020.100603
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    More about this item

    Keywords

    Bank credit tightening; Debt inflexibility; Lending standards; Yield spreads;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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