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Fallen Angels and Price Pressure

by Brent W. Ambrose of Pennsylvania State University,
Kelly N. Cai of the University of Michigan - Dearborn, and
Jean Helwege of Pennsylvania State University

June 2, 2009

Abstract: Previous empirical research has attempted to quantify the extent of price pressure when major quantities of a security are sold or bought, but most studies suffer from the fact that the unusually large sales or purchases involve information effects as well. We examine forced selling of fallen angel bonds by insurance companies to estimate price pressure effects. We restrict our sample of downgraded bonds to include only firms whose stock has no significant reaction to the downgrade, making the sale of these fallen angels far more likely to merely represent regulatory pressure to dispose of junk bonds. Once we control for information, we find that price pressure effects are negligible, if not non-existent. To the extent that any price pressure effects show up in these bond sales, they ought to be greater for illiquid bonds. We do not find that bond liquidity explains the variation in bond returns in our information-free sample, further supporting our contention that price pressure is not a major factor in security pricing.

JEL Classification: G10, G12 .

Keywords: price pressure, liquidity, fallen angel bonds, insurance companies.

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