Date of Award

2015

Document Type

Open Access Dissertation

Department

Moore School of Business

Sub-Department

Business Administration

First Advisor

Jean Helwege

Abstract

This dissertation is composed of three essays on corporate credit markets and corpo- rate finance. The first essay examines the impact of unconventional monetary policies (UMPs), including Quantitative Easing (QE), Operation Twist (OT), and Forward Guidance (FG), on corporate credit markets. These policies were expected to reduce credit spreads by decreasing credit risk premium and/or liquidity premium, and to further lengthen borrowing maturity. During the crisis, Quantitative Easing (QE) 1 reduced these risk premia as expected. However, after the crisis, QE 2 and Oper- ation Twist announcements increased fears of a weaker economy and, consequently, widened credit spreads. In contrast, Forward Guidance reduced credit risk premia without increasing fear premia. I also find that QE had a minimal effect on corporate bond maturities, which most likely reflected the considerable increase of new Treasury issuance and the declining fraction of preferred-habitat investors. The largest impact on corporate bond maturities came from UMPs that significantly flattened the yield curve. The second essay (published in the Journal of Fixed Income) studies the impact of margin requirements on the Credit Default Swap (CDS) basis. The CDS basis was significantly negative during the 2007-2009 financial crisis, which was considered an anomaly. Using single-name CDS data, we find that the CDS basis decreases as the funding costs, credit risk premium, and market illiquidity increase. Further, cross- sectional results show that the sensitivities of the CDS basis to funding costs, credit risk premium, and market illiquidity are priced, even after controlling for the indi- vidual bond liquidity and other firm characteristics. The results are consistent with the margin-based asset pricing theories that the difference in margin requirements on two otherwise identical securities gives rise to bases. The third essay (co-authored with Yongqiang Chu) examines the relationship be- tween a firm’s leverage and that of its customers. The bargaining theory of capital structure predicts that, when a customer increases its bargaining power by increas- ing its leverage, the supplier will raise its leverage as well in order to maintain its bargaining power. However, the relation-specific investment theory of capital struc- ture suggests an opposite relationship. An increased leverage ratio reduces the value of such investments, and, therefore, the supplier may not compete on the leverage ratio. We find that, in general, a firm’s leverage is positively associated with its customer’s leverage, and we find empirical evidence supporting both theories. The result is robust to a battery of specifications and instrumental variables.

Rights

© 2015, Liying Wang

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