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Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels

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  • Acharya, Viral
  • Banerjee, Ryan
  • Crosignani, Matteo
  • Eisert, Tim
  • Spigt, Renée

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 cutoff---enjoyed subsidized bond financing in 2009-19. This effect is driven by prolonged cumulative Fed purchases of securities inducing long-duration IG-focused investors to rebalance their portfolios towards higher-yielding IG bonds. The benefiting firms (i) exploited the sluggish downward adjustment of credit ratings after M&A to finance risky acquisitions with bond issuances, (ii) increased market share affecting competitors' employment and investment, but (iii) suffered severe downgrades at the onset of the pandemic.

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  • Acharya, Viral & Banerjee, Ryan & Crosignani, Matteo & Eisert, Tim & Spigt, Renée, 2022. "Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels," CEPR Discussion Papers 17032, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17032
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    Cited by:

    1. Nadav Ben Zeev & Noam Ben-Ze’ev & Daniel Nathan, 2025. "Capital Inflow Shocks and Convenience Yields," Working Papers 2503, Ben-Gurion University of the Negev, Department of Economics.
    2. Marco Pagano & Josef Zechner, 2022. "COVID-19 and Corporate Finance [The risk of being a fallen angel and the corporate dash for cash in the midst of COVID]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(4), pages 849-879.
    3. Abidi, Nordine & Falagiarda, Matteo & Miquel-Flores, Ixart, 2023. "Quantitative easing and credit rating agencies," International Review of Financial Analysis, Elsevier, vol. 86(C).
    4. Warinthip Worasak & Nuwat Nookhwun & Pongpitch Amatyakul, 2022. "Monetary Policy and Risk-Taking: Evidence from Thai Corporate Bond Markets," PIER Discussion Papers 186, Puey Ungphakorn Institute for Economic Research.
    5. Acharya, Viral V. & Plantin, Guillaume & Reggiani, Pietro & Yao, Iris, 2024. "Monetary easing, lack of investment and financial instability," Journal of Financial Intermediation, Elsevier, vol. 59(C).
    6. Breckenfelder, Johannes & De Falco, Veronica, 2024. "Investor heterogeneity and large-scale asset purchases," Working Paper Series 2938, European Central Bank.
    7. Valentin Haddad & Alan Moreira & Tyler Muir, 2025. "Whatever It Takes? The Impact of Conditional Policy Promises," American Economic Review, American Economic Association, vol. 115(1), pages 295-329, January.
    8. Patrick Aldridge & David Cimon & Rishi Vala, 2023. "Central Bank Crisis Interventions: A Review of the Recent Literature on Potential Costs," Discussion Papers 2023-30, Bank of Canada.
    9. Egemen Eren & Denis Gorea & Daojing Zhai, 2025. "How do quantitative easing and tightening affect firms?," BIS Working Papers 1286, Bank for International Settlements.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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