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Nonfinancial Firms as Cross‐Market Arbitrageurs

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  • YUERAN MA

Abstract

I demonstrate that nonfinancial corporations act as cross‐market arbitrageurs in their own securities. Firms use one type of security to replace another in response to shifts in relative valuations, inducing negatively correlated financing flows in different markets. Net equity repurchases and net debt issuance both increase when expected excess returns on debt are particularly low, or when expected excess returns on equity are relatively high. Credit valuations affect equity financing as much as equity valuations do, and vice versa. Cross‐market corporate arbitrage is most prevalent among large, unconstrained firms, and helps account for aggregate financing patterns.

Suggested Citation

  • Yueran Ma, 2019. "Nonfinancial Firms as Cross‐Market Arbitrageurs," Journal of Finance, American Finance Association, vol. 74(6), pages 3041-3087, December.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:6:p:3041-3087
    DOI: 10.1111/jofi.12837
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    Cited by:

    1. He, Wen & Hu, Maggie Rong & Mi, Lin & Yu, Jin, 2021. "How stable are corporate capital structures? International evidence," Journal of Banking & Finance, Elsevier, vol. 126(C).
    2. Liao, Gordon Y., 2020. "Credit migration and covered interest rate parity," Journal of Financial Economics, Elsevier, vol. 138(2), pages 504-525.
    3. Kubitza, Christian, 2021. "Investor-driven corporate finance: Evidence from insurance markets," ICIR Working Paper Series 43/21, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    4. Cook, Douglas O. & Zhang, Weiwei, 2022. "CEO option incentives and corporate share repurchases," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 355-376.
    5. Pegoraro, Stefano & Montagna, Mattia, 2021. "Issuance and valuation of corporate bonds with quantitative easing," Working Paper Series 2520, European Central Bank.
    6. Liang Chen & Minyuan Zhang, 2023. "Common Correlated Effects Estimation of Nonlinear Panel Data Models," Papers 2304.13199, arXiv.org.
    7. Kahle, Kathleen & Stulz, René M., 2021. "Why are corporate payouts so high in the 2000s?," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1359-1380.
    8. Jeremy C. Stein, 2021. "Can Policy Tame the Credit Cycle?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(1), pages 5-22, March.
    9. Croce, Mariano M. & Marchuk, Tatyana & Schlag, Christian, 2022. "The leading premium," SAFE Working Paper Series 371, Leibniz Institute for Financial Research SAFE.
    10. Gyimah, Daniel & Siganos, Antonios & Veld, Chris, 2021. "Effects of financial constraints and product market competition on share repurchases," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    11. Zhu, Qifei, 2021. "Capital supply and corporate bond issuances: Evidence from mutual fund flows," Journal of Financial Economics, Elsevier, vol. 141(2), pages 551-572.
    12. Kathleen Kahle & René M. Stulz, 2020. "Why Are Corporate Payouts So High in the 2000s?," NBER Working Papers 26958, National Bureau of Economic Research, Inc.
    13. Xiao Wang & Yongwen Luo & Ziyan Zhu, 2023. "Capital Account Liberalization and International Corporate Bond Issuance: Transaction‐level Evidence from China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(6), pages 156-178, November.

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