Do Firms Cater to Corporate QE? Evidence from the Bank of Japan’s Corporate Bond Purchases during the COVID-19 Pandemic

Abstract

The Federal Reserve and Bank of Japan corporate bond purchase programs in response to the COVID-19 crisis primarily target bonds with five years or less remaining to maturity. This paper documents evidence suggesting that firms in Japan, but not in the U.S., have catered to the maturity-specific demand shock by shifting the maturity of new bond issues. Most strikingly, in Japan, there is a large and disproportionate reduction in issuance of bonds maturing in seven years, a previously popular maturity just above the maturity eligibility criterion. I argue that Japanese results are consistent with heterogeneous firms facing a trade-off between the gain from shortening maturities to match the positive demand shock and the cost of deviating from their intrinsically optimal maturities. An analysis of simultaneous issuances of multiple-maturity bonds further supports the catering explanation. Thus, this paper documents a novel unintended effect of corporate quantitative easing (QE) and has important policy implications.