Which Firms Benefited from Corporate Quantitative Easing in Europe during the COVID-19 Crisis?

The COVID-19 pandemic caused a sharp reduction of economic activity in the first months of 2020, which negatively affected the revenues, liquidity, and, potentially, the solvency of many firms. In response to this crisis, the European Central Bank (ECB) announced the Pandemic Emergency Purchase Program (PEPP) in the evening of March 18, 2020, earmarking 750 billion euros for the purchase of government and private debt securities until the end of 2020. PEPP-eligible private debt instruments are investment-grade, issued by non-bank companies incorporated in the euro area, and dominated in euros. Similarly, the Bank of England (BoE) announced an expansion of its asset-purchase program by 200 billion pounds in the afternoon of March 19, 2020. Eligible assets include investment-grade bonds issued by companies that make a substantial contribution to economic activity in the UK, as indicated, for instance, by significant employment in the UK or company headquarters in the UK. By increasing demand for corporate bonds through these corporate quantitative easing (QE) programs, the ECB and BOE made it easier for corporations to issue additional bonds, thereby improving firms’ chances of surviving the pandemic.

In a new paper, we examine how the combined ECB and BoE corporate QE announcements affected the valuations of corporate equity and debt in Europe as implicit in share price and credit default swap (CDS) spread reactions. We take into account, among other things, whether firms were highly affected by the pandemic as well as variation in the national fiscal responses to the pandemic. Our research yields four main findings:

1. Both the shareholders and bondholders of firms that can issue investment-grade debt benefitted relatively more from corporate QE compared to other firms

Studying abnormal returns suggest that shareholders of firms that can issue investment-grade debt benefited relatively more from corporate QE announcements compared to other firms, consistent with the announced corporate QE applying to investment-grade debt securities. These firms also benefited even more if they relied relatively more on bond finance. At the same time, the CDS spread of investment-grade firms also declined relatively more than other firms, suggesting improved expectations of solvency for such firms. As evidence of spillovers, European firms with a non-investment-grade rating also experienced greater abnormal returns compared to firms without a credit rating, although the stock price response for non-investment-grade firms is weaker than for investment-grade firms.

2. Shareholders of highly leveraged firms gain relatively less from QE compared to debtholders, suggesting debt overhang

Further comparing shareholder and debtholder gains, we find that the share of shareholder gains in total shareholder and debtholder gains is negatively related to a book-to-market ratio and to leverage. The finding that the shareholders of highly leveraged firms gain relatively less from QE compared to debtholders suggests that there is a debt overhang effect on financial asset prices following a monetary easing, which we also explore in a model of the expected effects of QE announcements on the valuation of corporate equity and debt.

3. Firms more heavily impacted by the pandemic gain less from corporate QE, which could also reflect debt overhang

Turning to the COVID-19 shock, we find that firms in industries that are highly affected benefited relatively less from the QE announcements, as they experienced a relatively lower abnormal stock return and a relatively smaller decline in the CDS spread. These results could reflect that highly affected firms are expected to borrow relatively less at the market interest rates that are influenced by QE, either because these firms face diminished and uncertain prospects or because of borrowing constraints. The failure of monetary policy to be particularly beneficial for highly affected firms reflects it untargeted nature, which makes it a blunt policy instrument, if the primary aim is to assist firms hit disproportionately by a large negative real shock.

4. The monetary and fiscal responses to the pandemic are complements

Finally, our results indicate that firms located in countries with a stronger fiscal response to the pandemic tend to benefit relatively more from the QE announcements. In particular, firms that rely relatively more on bond finance experience higher abnormal stock returns and greater CDS declines, if located in countries with a stronger fiscal response. Using the sovereign CDS spread as an alternative fiscal indicator, we similarly find that investment-grade firms gain more, if located in countries with high sovereign CDS spreads that stand to gain more from purchases of government debt as part of QE. Overall, these results suggest that monetary and fiscal policy are complements in the sense that a stronger fiscal response at the time of the pandemic enhanced the potential for QE to benefit firms. This complementarity could reflect that expansive fiscal policy can create opportunities for additional corporate borrowing, and hence enhance the scope for higher equity and debt valuations following a reduction in the interest rate.