Sergey Chernenko, Business Economics PhD
Dissertation Chair: Professor David Scharfstein
The Real Consequences of Market Segmentation
We study the effects of market segmentation due to credit ratings on firm investment. We focus on a matched sample of BBB- and BB+ firms just above and below the investment-grade cutoff. These firms are similar on observable characteristics and face similar shocks to profitability and investment opportunities. However, flows into high-yield mutual funds only affect the cost of capital for the speculative-grade firms. These cost of capital shocks in turn affect issuance and investment decisions, especially for firms that are smaller, do not pay dividends, cannot substitute to bank loans, or are less able to access the asset-backed market. While on average matched BB+ and BBB- firms have similar rates of investment, shocks to fund flows cause the investment of BB+ firms to deviate from the investment of matched BBB- firms. Moreover, flows induce excess comovement between the investment of BB+ firms and lower rated speculative-grade firms in unrelated industries.
