Is Public Debt Arm's Length? Evidence from Corporate Bond Purchases of Life Insurance Companies

We show that bond financing is more similar to relationship lending than commonly believed and the borrower-lender relationship in this market may influence how economic shocks affect borrowing firms. In particular, we demonstrate the relationship between bond issuing corporations and life insurance companies, the largest institutional holders of corporate bonds, by showing that a life insurance company purchases a larger amount of a new bond issue if it already holds a larger share of that particular issuer's outstanding bonds. Using the drop in corporate bond and stock returns during COVID-19 as a natural experiment, we find that this familiarity-based relationship dampens the effect of economic shocks on the borrowers that rely more heavily on lending by life insurance companies.