Is Public Debt Arm's Length? Evidence from Corporate Bond Purchases of Life Insurance Companies

46 Pages Posted: 6 Apr 2022 Last revised: 9 Jan 2023

See all articles by Monica Barbosa

Monica Barbosa

University of Chicago

Ali K. Ozdagli

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: February 22, 2021

Abstract

We show that bond financing is more similar to relationship lending than commonly believed and the borrower-lender relationship in this market may influence how economic shocks affect borrowing firms. In particular, we demonstrate the relationship between bond issuing corporations and life insurance companies, the largest institutional holders of corporate bonds, by showing that a life insurance company purchases a larger amount of a new bond issue if it already holds a larger share of that particular issuer's outstanding bonds. Using the drop in corporate bond and stock returns during COVID-19 as a natural experiment, we find that this familiarity-based relationship dampens the effect of economic shocks on the borrowers that rely more heavily on lending by life insurance companies.

Keywords: Corporate bonds, insurance companies, arm's length lending, relationship lending, asset pricing

JEL Classification: G12, G20, G23, G30

Suggested Citation

Barbosa, Monica and Ozdagli, Ali K., Is Public Debt Arm's Length? Evidence from Corporate Bond Purchases of Life Insurance Companies (February 22, 2021). Available at SSRN: https://ssrn.com/abstract=4041647 or http://dx.doi.org/10.2139/ssrn.4041647

Monica Barbosa

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Ali K. Ozdagli (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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