Bond funds and credit risk

Choi, Jaewon, Dasgupta, Amil ORCID: 0000-0001-8474-9470 and Oh, Ji (2022) Bond funds and credit risk. Financial Markets Group Discussion Papers (857). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

We show that supply-side effects arising from the bond holdings of open-end mutual funds affect corporate credit risk. In our model, funds exposed to flow-performance relationships are reluctant to roll over bonds of companies with weak cash flow prospects fearing future outflows. This lowers rollover prices, enhancing equityholders' strategic default incentives, engendering a positive association between bond funds' presence and credit risk. Empirically, we find that in firms with weak cash flow prospects, fund holding shares increase CDS spreads, and more so when flows are more sensitive to performance. We use instrumental variables and quasi-experiments to address endogeneity concerns.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2022 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G23 - Pension Funds; Other Private Financial Institutions G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
Date Deposited:	18 May 2023 09:03
Last Modified:	01 Oct 2024 03:19
URI:	http://eprints.lse.ac.uk/id/eprint/118856

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