Abstract

http://ssrn.com/abstract=1107480
 
 

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Investment Horizon of the Bond Investor Base and the Leverage of the Firm


Massimo Massa


INSEAD - Finance

Ayako Yasuda


University of California, Davis - Graduate School of Management

Lei Zhang


Nanyang Technological University (NTU)

October 10, 2010

AFA 2009 San Francisco Meetings Paper

Abstract:     
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

working papers series


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Date posted: March 25, 2008 ; Last revised: October 12, 2010

Suggested Citation

Massa, Massimo and Yasuda, Ayako and Zhang, Lei, Investment Horizon of the Bond Investor Base and the Leverage of the Firm (October 10, 2010). AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1107480 or http://dx.doi.org/10.2139/ssrn.1107480

Contact Information

Massimo Massa
INSEAD - Finance ( email )
Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)
Ayako Yasuda (Contact Author)
University of California, Davis - Graduate School of Management ( email )
One Shields Avenue
Davis, CA 95616
United States
530-752-0775 (Phone)
530-752-2924 (Fax)
HOME PAGE: http://www.ayakoyasuda.com
Lei Zhang
Nanyang Technological University (NTU) ( email )
50 Nanyang Avenue
S3-B1A-14
Singapore, 639798
Singapore
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