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We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels—risky firms just above the IG rating cutoff—enjoyed subsidized bond financing between 2009 and 2019, especially when the scale of QE purchases peaked and from long-duration IG-focused investors that held more securities purchased in QE programs. The benefiting firms financed risky acquisitions with bond issuances, exploiting the sluggish adjustment of credit ratings in downgrading issuers after M&A. This activity increased the firms’ market share, adversely affecting competitors’ employment and investment. Eventually, these firms suffered severe downgrades at the onset of the pandemic.

Other publications

We use natural language text analysis of financial statements published by 14,000 non-financial firms in the euro area, UK and US to shed light on the use of financial derivatives to hedge interest rate risk. 


We show that around 50% of firms with variable rate debt hedge their interest rate risk. Firms that hedge interest rate risk tend to be larger and have smaller cash buffers and lower equity valuations.


When interest rates rise, firms that hedge their interest rate risk experience a smaller negative impact on their interest coverage ratios and market valuations. They are also better able to maintain the size of their workforce.

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