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Bank loans and bond prices

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  • Weston, James
  • Yimfor, Emmanuel

Abstract

We test whether bank loans change public bond yields. A 25% increase in bank debt raises bond yields by 8 bps, reflecting a trade-off between the benefits of bank cross-monitoring and higher bond risk. This effect is smaller for firms with no credit default swaps (CDSs) and with junk debt—scenarios where bank monitoring is most valuable. It is unlikely that firms with bank debt are riskier, because they are less likely to be downgraded and have lower loan spreads. We find similar results using a natural experiment around the 2014 oil shock. Our results highlight how bond yields depend on incentive conflicts among creditors.

Suggested Citation

  • Weston, James & Yimfor, Emmanuel, 2023. "Bank loans and bond prices," Journal of Corporate Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:corfin:v:80:y:2023:i:c:s092911992300055x
    DOI: 10.1016/j.jcorpfin.2023.102406
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    References listed on IDEAS

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    More about this item

    Keywords

    Banking relationships; Bank loans; Corporate debt; Yield spreads; Bank cross-monitoring; Debt structure;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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