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

54 Pages Posted: 18 Oct 2007 Last revised: 12 Oct 2010

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Lei Zhang

City University of Hong Kong (CityU)

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2010

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.

Keywords: institutional investors; corporate bonds; investment horizon; corporate finance; capital structure; leverage; clientele; investor base

JEL Classification: G1, G2

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). INSEAD Business School Research Paper No. 2007/57/FIN/ACGRD, Available at SSRN: https://ssrn.com/abstract=1021235 or http://dx.doi.org/10.2139/ssrn.1021235

Massimo Massa (Contact Author)

INSEAD - Finance ( email )

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+33 1 6072 4045 (Fax)

Ayako Yasuda

University of California, Davis - Graduate School of Management ( email )

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Davis, CA 95616
United States
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530-752-2924 (Fax)

HOME PAGE: http://www.ayakoyasuda.com

Lei Zhang

City University of Hong Kong (CityU) ( email )

College of Business
83 Tat Chee Avenue
Hong Kong
China

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