Issuance and Valuation of Corporate Bonds with Quantitative Easing

After the announcement of the corporate quantitative easing program by the European Central Bank, nonfinancial corporations timed the corporate bond market by shifting their issuance toward bonds that were eligible for the program. However, issuers of eligible bonds did not increase total issuance relative to other issuers, nor did they experience different real economic outcomes. Instead, we find evidence of substantial spillover effects on risk premia. Whereas the valuation of eligible corporate bonds did not change relative to ineligible bonds, the announcement increased investors' appetite for credit risk, both in the corporate bond market and in the CDS market. Firms timed the decrease in risk premia by substituting toward riskier bond types. Using a novel and comprehensive dataset of corporate bonds in the euro area, we document how firms substituted across bond characteristics, and we find evidence of their intention to time the market. To interpret our results, we provide a model in which the market timing activity of firms is instrumental for the effects of quantitative easing to spill over from eligible bonds into the wider market