Bond Funds and Credit Risk

Bond Funds and Credit Risk

Jaewon Choi, Amil Dasgupta, Ji Yeol Jimmy Oh

Series number :

Serial Number: 
639/2019

Date posted :

November 22 2019

Last revised :

July 03 2023
SSRN Share

Keywords

  • Fund Flows • 
  • credit risk • 
  • flow concerns • 
  • bond rollover • 
  • default-liquidity loop

We show that supply-side effects arising from the bond holdings of open-end mutual funds affect corporate credit risk. In our model, funds exposed to flow-performance relationships are reluctant to roll over bonds of companies with weak cash flow prospects fearing future outflows.

This lowers rollover prices, enhancing equityholders’ strategic default incentives, engendering a positive association between bond funds’ presence and credit risk. Empirically, we find that in firms with weak cash flow prospects, fund holding shares increase CDS spreads, and more so when flows are more sensitive to performance. We use instrumental variables and quasi-experiments to address endogeneity concerns.

Authors

Real name:
Jaewon Choi
Real name:
Ji Yeol Jimmy Oh