Fallen Angels and Total Factor Productivity: Evidence from US Firms

Abstract

This study explores the role of fallen angels in Total Factor Productivity (TFP) at a firm level in the US over the period 2009–2019. The results indicate that fallen angels lead to capital misallocation and to a reduced TFP. This explains why growth remained below expectations, despite the abundance of funds directed by the Fed and the tendency of investors toward corporate bonds, particularly BBB-rated issues. The study identifies the impact of fallen angels on firms’ TFP in the US. Its noveltyis that it employs for the first time a model that brings together the role of fallen angels for US TFP on the firm level. Robustness checks based on a different methodology and on different production functions support the baseline results. It also performs a robustness check (distinguishing between small and large firms) to document that the capital misallocation originating from fallen-angel shocks explains any aggregate TFP drop.