Our objective in this paper is to determine empirically the extent to which fixed-income investors are concerned about the relative effects of equity volatility and bond liquidity in the cross-section of corporate bond spreads. Our tests reveal that while both volatility and liquidity effects are significant, volatility, representing ex-ante credit shock, has the first-order impact, and liquidity represented by bond characteristics and price impact measure has the secondary impact on bond spreads. Conditional analysis further reveals that distressed bonds and distress regimes are both associated with significantly higher impact of volatility and liquidity shocks. However, the relative impact of these effects varies conditional on the underlying bond attributes and overall market conditions.

While government led bank capital infusions in US and other developed markets have been usually contingent an external shock or crisis episode, India presents a unique setting where significant capital infusions happen annually to stabilize the weak balance sheets of undercapitalized government owned public sector banks. Such “repeated” capital infusions can either better engender financial stability, given the timely government interventions; or create instability arising from possible moral hazard concerns. "Do such repeated government capital infusions lower banks’ financial risks and improve financial stability?” We shed light on the question through the lens of capital infusions in the Indian market. Based on the exhaustive sample of government capital infusions into public sector banks for the period 2008–18, we find robust evidence that capital infusions are associated with economically significant higher default, capital shortfall and network risks post-infusion, signaling a moral hazard problem, where treated banks may assume more risky investments.

Financial innovation through the creation of new markets and securities impacts related markets as well, changing their efficiency, quality (pricing error), and liquidity. The credit default swap (CDS) market was undoubtedly one of the salient new markets of the past decade. In this paper we examine whether the advent of CDS trading was beneficial to the underlying secondary market for corporate bonds. We employ econometric specifications that account for information across CDS, bond, equity, and volatility markets. We also develop a novel methodology to utilize all observations in our data set even when continuous daily trading is not evidenced, because bonds trade much less frequently than equities. Using an extensive sample of CDS and bond trades over 2002–2008, we find that the advent of CDS was largely detrimental. Bond markets became less efficient, evidenced no reduction in pricing errors, and experienced no improvement in liquidity. These findings are robust to various slices of the data set and specifications of our tests.

Industry competition shocks are major drivers of mergers and acquisitions (M&A). We document strong positive effects of competition shocks on M&A-related covenant redesign. Acquiring firms in high-competition environments are significantly more likely to undertake tender offer bond repurchases and reduce restrictions on mergers, investments, payouts, and financing, but increase change-in-control covenants. This effect is stronger for larger, more profitable firms. Moreover, announcement returns from M&A transactions of redesigning firms in more competitive settings are significantly higher, while acquisition deal premiums are lower. Our study shows the significant effect of industry competition shocks on debt recontracting in M&A.

We study the dynamic impact of idiosyncratic volatility and bond liquidity on corporate bond spreads over time and empirically disentangle both effects. Using an extensive data set, we find that both idiosyncratic volatility and liquidity are critical mainly for the distress portfolios, i.e., low-rated and short-term bonds; for others only volatility matters. The effects of volatility and liquidity shocks on bond spreads were both exacerbated during the recent financial crisis. Liquidity shocks are quickly absorbed into bonds prices; however, volatility shocks are more persistent and have a long-term effect. Our results overall suggest significant differences between how volatility and liquidity dynamically impact bond spreads.

We study secondary market trades of debt issues by foreign firms in the U.S. under SEC Rule 144A, a unique market where the counterparties are qualified institutional buyers (QIBs). We find that even though the secondary yield spreads of foreign 144A debt issues are larger than comparable public debt issues by foreign and domestic firms in the U.S., the incremental impact of common risks – namely, credit, illiquidity, governance, and familiarity risks – on spreads are lower for foreign 144A issues compared to various control samples. Our finding is consistent with the notion that institutional participants, namely QIBs, play a specialized role in mitigating risk exposures in the foreign 144A secondary market.

This paper contributes to existing climate finance literature by examining how firms' proactive management of carbon risks affects market assessment of their credit risk. Using two quasi-exogenous events involving the 2015 Paris Climate Agreement and the staggered implementation of U.S. state climate adaptation plans, we find that stronger carbon risk management is associated with significantly lower credit default swap spreads. Our results are not driven by firm-level climate exposure, and social or governance risk. Firms with better carbon risk management also exhibit lower subsequent carbon emissions. Our paper highlights the importance of carbon risk management in mitigating credit risk.