Bank credit tightening, debt market frictions, and corporate yield spreads

We study how credit supply frictions in the regional availability of debt financing in the U.S. affect  corporate  yield  spreads.  We  define  a  measure  of  debt  inflexibility  that  captures  the firm’s  inability  to  buffer  a  tightening  in  bank  credit  by  replacing  bank  loans  with  corporate bonds.  We  document  that  more  inflexible  firms  suffer  a  higher  increase  in  yield  spreads  as bank  credit  tightens.  This  happens  for  both  market-wide  tightening  in  lending  standards  and firm-specific  tightening  upon  loan  covenant  violations.  Moreover,  inflexible  firms  display  a closer connection between changes in yield spreads and stock returns.