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http://ssrn.com/abstract=2228984
 
 

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Supply Uncertainty 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)

February 22, 2013

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We examine the effect of the bond capital supply uncertainty of institutional investors (e.g., mutual bond funds and insurance companies) on the leverage of the firm using a novel dataset. Our main finding is that the supply uncertainty of the firm’s bond investor base — measured as (i) the average portfolio turnover or (ii) the average flow volatility of investors holding the firm’s bonds, or (iii) the prevalence of mutual funds among the firm’s bondholders as opposed to insurance companies — has a negative and significant effect on the leverage of the firm. The supply uncertainty of the firm’s bond investor base also has a negative and significant effect on the firm’s probability of issuing bonds, and a positive and significant effect on the firm’s probability of issuing equity and borrowing from banks. We take a multi-pronged approach to address potential endogeneity issues, including use of geography-based instruments and firm fixed effects, subsample analyses, and a placebo test. Our results highlight the fragility of access to the bond market for companies that depend on mutual funds with high turnover/flow volatility as primary bond investors.

Number of Pages in PDF File: 61

Keywords: institutional investors, corporate bonds, capital supply uncertainty, corporate finance, capital structure, leverage, clientele, investor base

JEL Classification: G1, G2

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Date posted: March 6, 2013  

Suggested Citation

Massa, Massimo and Yasuda, Ayako and Zhang, Lei, Supply Uncertainty of the Bond Investor Base and the Leverage of the Firm (February 22, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=2228984

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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