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

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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 IGfocused 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.

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  • Viral V. Acharya & Ryan N. Banerjee & Matteo Crosignani & Tim Eisert & Renée Spigt, 2022. "Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels," Staff Reports 1004, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:93784
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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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