The Spillover Effects of Hurricane Katrina on Corporate Bonds and the Choice between Bank and Bond Financing

This paper explores the spillover effects of Hurricane Katrina on corporate bonds through the liquidations of bond holdings by property and reinsurance companies exposed to the Katrina shock. We find that the sales of exposed property and reinsurance companies create a persistent negative price impact on bond prices. There is some evidence of partial price reversal only after seven months since Katrina. Investors foresee the forced sales and increase short selling of the affected bonds around the Katrina period. We then exploit the event of Hurricane Katrina to test how a shift in the supply of bonds affects the structure of subsequent debt financing. We show that the Katrina shock negatively impact the decision of the affected firms to resort to bond financing, redirecting them towards bank financing. This shift is stronger for firms with higher expected investment needs, as well as for firms located in areas with higher availability of local bank supply. This occurs jointly with a significant reduction in debt maturity due to both the composition change between bonds and bank loans and a reduction of the bond maturity. Interestingly, there is no significant effect on the changes of capital structure after Katrina, suggesting that the substitution from corporate bonds to bank loans is sufficient in the amount of borrowing