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QE Corporate Bond Purchases and Corporate Financing Costs

Article Quant Q&A · Author: Marie. P.
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Summary

The document asks whether quantitative easing (QE) measurably changes large firms’ financing costs and whether eligible firms compete for central bank purchases. Its answer identifies this effect as the capital structure transmission channel of monetary policy: corporate bond purchases can lower borrowing costs for eligible firms and shift their financing from bank loans toward bond issuance.

The cited study reports that eligible firms’ bond yields fell by 40 basis points one year after the purchase announcement, while firms outside the program saw no comparable yield change. Eligible firms increased bond leverage by 13%, partly replacing bank debt. The account also describes a spillover: banks expanded lending to private firms, relaxed credit standards, and took on more risk. These findings concern a particular purchase program and study; the document does not give evidence on competition among firms for purchases or establish that QE has identical effects across programs.

Key ideas

  • Corporate bond purchases can lower financing costs for firms eligible for a QE program.
  • Eligible firms may replace some bank borrowing with bond financing.
  • The cited study reports lower yields for eligible firms and unchanged yields for firms outside the program.
  • The shift toward bond financing may free bank lending for private firms while increasing bank risk taking.

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# Measurable effects of quantitative easing on corporate financing cost


# Measurable effects of quantitative easing on corporate financing cost












I have read about Quantitative Easing (QE) and its attempt to bring back inflation. In this, central banks create money, then give it to other banks that buy government bonds, corporate bonds, and assets, in order to increase prices.

I believe there are some drawbacks with this, such as perhaps an unfair preference of corporate bonds of large firms compared to SMEs in this "trickle-down" money proliferation, but I could not find evidence or numbers on this.

Regarding large firms whose corporate bonds are bought up, I am wondering if there are any measurable effects on the cost of corporate financing. QE is happening since 2009, but I could not find numbers regarding its actual effects. Also, there should be some competition between large firms as to which one's bonds are bought with the new money.

Are you aware of empirical results regarding the changing cost of capital and competition between firms for fiat money due to QE?

## Answer by alexbougias (score 1)

https://quant.stackexchange.com/a/45441

In the literature, this is called capital structure transmission channel of monetary policy. A recent paper, addresses this question$^\star$.As Central Bank announces purchase of corporate bonds, firms of interest exhibit lower bond yields (40bps one year after announcement) and shift to bond market, relatively to bank loans. Note that firms not included in the program maintain the same bond yields. Eligible firms increase bond leverage by 13%, substituting partially bank debt. This increases bank lending to private firms (which are more financially constrained/opaque), previously possibly credit rationed. Banks relax their credit standards and increase their risk taking.

$^ \star$Grosse-Rueschkamp, Benjamin and Steffen, Sascha and Streitz, Daniel, A Capital Structure Channel of Monetary Policy (September 18, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2988158 or http://dx.doi.org/10.2139/ssrn.2988158

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.