Spare tyres with a hole: investment funds under stress and credit to firms
We study the impact of a liquidity shock affecting investment funds on the financing conditions of firms. The abrupt liquidity needs of investment funds, triggered by the outbreak of the Covid-19 pandemic, prompted a retrenchment from bond purchases of firms and a withdrawal of short term funds from banks, impacting firm financing costs directly via bond markets, and indirectly via banks. According to our results, the spreads of corporate bonds held by investment funds increased.