When Central Banks Buy Corporate Bonds: Target Selection and Impact of the European Corporate Sector Purchase Program

Abstract

In March 2016 the European Central Bank (ECB) announced the Corporate Sector Purchase Program (CSPP) as part of its expanded asset purchase program. Using hand-collected, weekly lists of bonds purchased and held under the CSPP, we investigate the drivers of the purchase decisions and the impact of the program on the financing decisions of targeted firms. We find that, consistent with the goal of decreasing credit premia while minimizing price distortions, purchases of eligible bonds characterized by both higher credit risk and higher liquidity are more likely and more timely. Bonds issued by firms more likely to face difficulties in tapping the credit market directly are also more likely to be purchased. The CSPP appears effective in alleviating these difficulties. Firms targeted by the program increase their amount of bonds outstanding significantly more than non-targeted eligible issuers; the effect is mostly driven by companies making limited use of market debt before the start of the program. However, no difference is found in the variation of total debt between targeted and non-targeted eligible issuers. Together, these results suggest that the CSPP has favored the substitution of bonds for other forms of debt capital.

Collateral Eligibility of Corporate Debt in the Eurosystem

“…Others show the real e↵ects of LSAPs, more specifically, an increasing number of studies look at the CSPP. For instance, Grosse-Rueschkamp et al (2019), Abidi and Miquel-Flores (2018) and Todorov (2019) document how prices of assets eligible under the program are a↵ected by the announcement of purchases, while Arce and Mayordomo (2017) and Galema and Lugo (2017) focus on the actual purchases.…”

“…Other studies either focus on crisis-triggered changes in collateral eligibility (Corradin and Rodriguez-Moreno, 2016;Van Bekkum et al, 2018), or on the announcement e↵ect of unconventional monetary policy actions, such the CSPP or the QE. Empirical evidence suggests that both the CSPP announcement (Grosse-Rueschkamp et al, 2019;Todorov, 2019) and its associated implementation, the QE, (Galema and Lugo, 2017;Arce and Mayordomo, 2017) have an e↵ect on firms' financing decisions and eventually on corporate debt structure. In contrast to these methodologically similar studies, our analysis is not only more general in that the collateral framework includes a wider range of firms than could be surmised from these studies, but the e↵ect on yields and firm's capital structure is comparable in magnitude.…”

Effects of Eligibility for Central Bank Purchases on Corporate Bond Spreads

“…Arce et al (2017), Ertan et al (2018), Grosse-Rueschkamp et al (2019) and Betz and De Santis (2019) study the indirect effects of the CSPP on the composition of bank lending. Galema and Lugo (2017) investigate the capital structure 2 See the press release "ECB announces the details of the corporate sector purchase programme (CSPP)" (April 21, 2016), accessible at https://www.ecb.europa.eu/press/ pr/date/2016/html/pr160421_1.en.html.…”

Issuance and Valuation of Corporate Bonds with Quantitative Easing

“…We also document that firms substituted between bond characteristics after the CSPP announcement, whereas existing work focuses on substitution between bonds and bank loans (Arce et al, 2017;Betz and De Santis, 2019;Ertan et al, 2020;Galema and Lugo, 2019;Grosse-Rueschkamp et al, 2019).…”