Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/262054 
Year of Publication: 
2022
Series/Report no.: 
Staff Report No. 1004
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels - risky firms just above the IG rating cutoff-enjoyed subsidized bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The benefitting firms used this privilege to fund risky acquisitions and increase market share, exploiting the sluggish adjustment of credit ratings in downgrading after M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.
Subjects: 
corporate bond market
investment-grade bonds
large-scale asset purchases (LSAP)
credit ratings
credit ratings inflation
JEL: 
E31
E44
G21
Document Type: 
Working Paper

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