Investment Horizon of the Bond Investor Base and the Leverage of the Firm
INSEAD - Finance
University of California, Davis - Graduate School of Management
Nanyang Technological University (NTU)
October 10, 2010
AFA 2009 San Francisco Meetings Paper
We examine the effect of the investor horizon of institutional bondholders (e.g., mutual bond funds and insurance companies) on the leverage of the firm using a novel dataset. Our main finding is that the investment horizon of the firm’s bond investor base (measured as functions of (i) the average portfolio turnover of investors holding the firm’s bonds, or (ii) the prevalence of mutual funds among the firm’s bondholders as opposed to insurance companies) has a positive and significant effect on the leverage of the firm. The investment horizon of the firm’s bond investor base also has a positive and significant effect on the firm’s probability of issuing bonds, and a negative and significant effect on the firm’s probability of issuing equity and borrowing from banks. The results are robust to controlling for potential endogeneity of the investor-firm matching using geography-based instruments. Our results highlight the vulnerability of companies that depend on short-horizon mutual funds as primary bond investors.
Number of Pages in PDF File: 54
Keywords: institutional investors; corporate bonds; investment horizon; corporate finance; capital structure; leverage; clientele; investor base
JEL Classification: G1, G2
Date posted: March 25, 2008 ; Last revised: October 12, 2010
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