Authors: Viral V. Acharya, Ryan N. Banerjee, Matteo Crosignani, Tim Eisert, and Renée Spigt
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Staff Reports
Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels
Number 1004
February 2022
February 2022
JEL classification: E31, E44, G21
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.
Author Disclosure Statement(s)
Viral V. Acharya
I, Viral V Acharya, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ryan Banerjee
I, Ryan Banerjee, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Matteo Crosignani
I, Matteo Crosignani, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Tim Eisert
I, Tim Eisert, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Renée Spigt
I, Renée Spigt, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
I, Viral V Acharya, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Ryan Banerjee
I, Ryan Banerjee, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Matteo Crosignani
I, Matteo Crosignani, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Tim Eisert
I, Tim Eisert, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Renée Spigt
I, Renée Spigt, author of the NY FED Staff Report submission “Exorbitant Privilege? Quantitative Easing and the Bond Market Subsidy of Prospective Fallen Angels” declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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