“Fallen Angels and Price Pressure” by Jean Helwege
University of South Carolina
Kelly N. Cai
University of Michigan – Dearborn
Brent W. Ambrose
Penn State University
Previous empirical studies on the extent of price pressure when large quantities of a security are traded typically suffer from information effects. We overcome this problem by examining forced selling of fallen angel bonds by insurance companies. Among these downgraded bonds, we restrict our sample to include only firms whose stock has no significant reaction to the rating change, making their bond sales highly likely to represent regulatory pressure rather than information-motivated trading. Our experiment reveals negligible, if not non-existent, price pressure effects. Moreover, we find that bond liquidity does not explain the variation in bond returns in our information free sample. Thus, our results indicate that price pressure is not a major factor in security pricing.