Corporate QE in Europe during the COVID-19 crisis and debt overhang

Abstract

This paper finds that shareholders of highly leveraged firms benefit relatively less compared to bondholders from the corporate QE announcements by the ECB and the Bank of England, 2020, as evidence of debt overhang. Firms more heavily impacted by the pandemic gain less from corporate QE, which could also reflect debt overhang. The monetary and fiscal responses to the pandemic are complements in the sense that a stronger pandemic-related fiscal response and higher pre-announcement sovereign CDS spreads enhance the positive effects of corporate QE on equity and debt valuations.