The Effects of Organizational Structure on Bond Investing: Do Bond Investors Behave like Banks?

Abstract

Using a unique dataset on the organizational structure of fixed income investors – i.e., mutual funds and insurance companies – we study the effects of organizational hierarchy on bond investing. Consistent with Stein (2002)’s theory of organizations, we find strong evidence that organizational hierarchy reduces the portfolio managers’ incentive to collect soft information. This suggests that bond investors are subject to similar institutional constraints imposed by organizational structures as traditionally observed among banks. More hierarchical funds invest less in bonds of local firms, hold less concentrated portfolios and herd more with the market. Overall, they deliver lower fund performances. We also show that changes in organizational hierarchy quickly find their way into fund behaviors.

Keywords: organizational structure, hierarchy, proximity investment, herding, performance

JEL Classification: G23, G30, G32