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

2023-06-30 16:09:52

We show that borrower-lender relationship is important for corporate bond financing and this relationship may influence how economic shocks affect borrowing firms. In particular, 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 bond and stock returns during COVID- 19, we find that this relationship dampens the effect of economic shocks on the borrowers that rely more heavily on lending by life insurance companies, consistent with these insurance companies’ status as large, long-horizon, and reliable lenders in this market.

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