Disruption and the Credit Markets

In the past 30 years, defaults on corporate bonds have been substantially higher than the historical average. Dividing the years from 1970 to 2016 into two equal periods, the default rate of U.S. corporate bonds rose from 0.12 percent to 0.46 percent, almost quadrupling. The figure below illustrates this development. In a recent working paper with Victoria Ivashina of Harvard, we investigate the role of corporate disruption in this trend.

If disruption is the process whereby new firms appear, using new technology and new business models, why would it affect default rates? Precisely because disruption involves new firms displacing old, … Read more