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Research
Sep 1, 2011

Regulatory Pressure and Fire Sales in the Corporate Bond Market

Abstract

This paper investigates fire sales of downgraded corporate bonds induced by regulatory constraints imposed on insurance companies. As insurance companies hold over one-third of investment-grade corporate bonds, the collective need to divest downgraded issues may be limited by a scarcity of counterparties. Using insurance company transaction data, we find that insurance companies that are relatively more constrained by regulation are more likely to sell downgraded bonds. Bonds subject to a high probability of regulatory-induced selling exhibit price declines and subsequent reversals. These price effects appear larger during periods when the insurance industry is relatively distressed and other potential buyers’ capital is scarce.

Citation

Ellul, Andrew, Jotikasthira, C., & Lundblad, C. T. (2011). Regulatory pressure and fire sales in the corporate bond market. Journal of Financial Economics101(3), 596–620. doi:10.1016/j.jfineco.2011.03.020

 

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals. 


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