Eurosystem Collateral Eligibility and Corporate Debt in the Eurozone

Authors: Zorka Simon (Goethe University), Loriana Pelizzon (Goethe University), Marti Subrahmanyam (NYU Stern) and Max Riedel (Goethe University)

Title: Eurosystem Collateral Eligibility and Corporate Debt in the Eurozone

Abstract: In the unique institutional framework of the Eurosystem, we study the pricing and real effects of central bank collateral eligibility in both the secondary and primary markets for corporate bonds. We find that eligible bonds (i) trade at lower yields, (ii) depending on their initial liquidity, exhibit an asymmetric liquidity response, and (iii) have an increased securities lending market activity, all driven by banks' demand for pledgeable collateral. Moreover, we observe that following bond-issuing firms’ first-time eligibility list inclusion, they reduce bank debt and expand corporate bond issuance activity, overall increasing the size and maturity of their total debt.