No abstract

We study reaching for yield among corporate bond mutual funds. In a low-interest-rate environment, funds may seek to invest in bonds with relatively higher yields than their benchmarks in order to attract flows. We show that funds engage in more reaching for yield when the level and slope of the yield curve are low and when the default spread is narrow. The funds that engage in reaching for yield are also exposed to greater illiquidity, exacerbating redemption risks. Younger and larger funds engage in more reaching for yield. When funds actively shift their portfolio towards higher yields, they experience higher inflows, indicating that investors respond positively to this behavior. Funds that * We thank Charles Trzcinka and seminar participants at the

No abstract

This paper provides evidence of ratings shopping in the corporate bond market. By estimating systematic differences in agencies’ biases about any given firm’s bonds, I show that new bonds are more likely to be rated by agencies that are positively biased toward the firm—a pattern that is strongest among bonds that have only one rating. The paper also shows that issuers often delay less favorable ratings until after a bond is sold. Consistent with theoretical models of ratings shopping, these effects are strongest among more complex bonds that are more difficult to rate. Bonds with upward-biased ratings are more likely to be downgraded and default, but investors account for this bias and demand higher yields when buying these bonds. This paper was accepted by Gustavo Manso, finance.

No abstract