Wednesday, March 9, 2016

Bondholder Concentration and Credit Risk: Evidence from a Natural Experiment

MANCONI Alberto, MASSA Massimo, ZHANG Lei
Access the publisher's website
Review of Finance 20, 1 (2016) 127-159

The authors exploit the impact of hurricane Katrina on insurance companies to study the relationship between bondholder concentration and credit risk. Redemption-driven sales by property and casualty (re)insurance companies exposed to hurricane Katrina are associated with a large drop in bondholder concentration faced by corporate bond issuers.

Exploiting this shock to capture exogenous variation in bondholder concentration, the authors find that greater bondholder concentration is associated with higher bond yield spreads, as well as with firm characteristics associated with credit risk.