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The Spillover Effects of Hurricane Katrina on Corporate Bonds and the Choice Between Bank and Bond Financing

Published online by Cambridge University Press:  22 June 2020

Massimo Massa  and
Lei Zhang Open the ORCID record for Lei Zhang [Opens in a new window]
Massimo Massa
Affiliation:
INSEADmassimo.massa@insead.edu
Lei Zhang*
Affiliation:
City University of Hong Kong College of Business
*
lzhan29@cityu.edu.hk (corresponding author)
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Abstract

We use an exogenous event, namely, the spillover effects of Hurricane Katrina on corporate bonds through the liquidation of bond holdings by insurance companies, to study how companies react to temporary changes in the relative availability of bond and bank financing. We find that the negative shock on bonds induces firms to shift from bond financing to bank-based borrowing and to shorten the debt maturity. This shift in debt policy does not revert in the long term. There is no significant change in capital structure, suggesting that the substitution from bonds to bank loans is sufficient for the amount of borrowing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 885 - 913
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington

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Footnotes

We thank two anonymous referees and Hendrik Bessembinder (the editor) for suggestions that significantly improved the paper. We also thank Stephen Dimmock, Chuan Yang Hwang, Jun-koo Kang, Jiang Luo, Chishen Wei, Xiaoyun Yu, and participants at the 2011 China International Conference in Finance and the 2012 American Finance Association Annual Meeting for helpful comments. All errors and omissions are our own.

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