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- Title
Market Discipline in the Direct Lending Space.
- Authors
Davydiuk, Tetiana; Marchuk, Tatyana; Rosen, Samuel
- Abstract
Using the exclusion of business development companies (BDCs) from stock indexes, this paper studies the effectiveness of market discipline in the direct lending space. Amid share sell-offs by institutional investors, a drop in BDCs' valuations limits their ability to raise new equity capital. Following this funding shock, BDCs do not adjust their capital structure. At the same time, they are reducing the risk exposure of their portfolios. We document a greater reduction in risk for BDCs subject to stronger market discipline from their debtholders. BDCs pass through the capital shock to their portfolio firms by reducing their investment intensity.
- Subjects
LOANS; BUSINESS development companies; STOCK price indexes; STOCKS (Finance); CAPITAL structure; INSTITUTIONAL investors; VALUATION; RISK exposure
- Publication
Review of Financial Studies, 2024, Vol 37, Issue 4, p1190
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhad081