The European Central Bank’s Corporate Debt Purchase Policy and Its Impact on Firm’s Equity Issues

Abstract

In response to the economic crisis of 2008 and the debt crises of some Eurozone countries, central banks began expansionary monetary policies, which became a massive injection of resources through the purchase of assets known as Quantitative Easing. The European Central Bank (ECB) took a step forward with its peers and, in addition to buying sovereign bonds through the Public Sector Purchase Program (PSPP), it also created the Corporate Sector Purchase Program (CSPP) in March 2016 to buy corporate bonds from non-financial companies located in the Eurozone. The CSPP program reduced corporate yields for companies with bonds eligible for purchase and those whose bonds are not purchased by the ECB. In this paper, we investigate the effects of the CSPP program on seasoned equity offerings (SEO) of firms in the Eurozone. We find that post CSPP firms earn even more negative cumulative abnormal returns (CAR) around SEOs than pre CSPP. The results suggest that, even with low corporate yields, investors are demanding higher equity returns.