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Market Discipline in the Direct Lending Space

Author

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  • Tetiana Davydiuk
  • Tatyana Marchuk
  • Samuel Rosen

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. At the same time, they are 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.

Suggested Citation

  • Tetiana Davydiuk & Tatyana Marchuk & Samuel Rosen, 2024. "Market Discipline in the Direct Lending Space," The Review of Financial Studies, Society for Financial Studies, vol. 37(4), pages 1190-1264.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:4:p:1190-1264.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad081
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    More about this item

    Keywords

    G23; G32;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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