Firms’ Response to Credit Supply: Evidence from Upsized Corporate Bond Offerings

Firms often respond to information about investor demand, learned when underwriters build the book to place corporate bonds, by “upsizing” the offering amount. We examine the factors that predict two measures of realized credit supply (oversubscription and yield tightening) and show that the unexpected component of credit supply can explain firms’ upsizing decisions. Because firms’ fundamentals and need for capital are unchanged in the few hours of bookbuilding, upsizing provides a bond-level measure that can be used to study the impact of credit supply on postissuance leverage and investment. Firms use the sizeable additional proceeds to reduce bank debt and increase cash holdings; net increases in leverage are temporary for riskier issuers. Our evidence does not support concerns of overinvestment in periods of accommodative credit markets. This paper was accepted by Bo Becker, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.00153 .