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

54 Pages Posted: 25 Mar 2008 Last revised: 12 Oct 2010

Massimo Massa

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Lei Zhang

Nanyang Technological University (NTU)

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). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1107480 or http://dx.doi.org/10.2139/ssrn.1107480

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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