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

55 Pages Posted: 15 Jan 2009 Last revised: 4 Sep 2014

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Lei Zhang

University of Queensland - Business School

Date Written: September 1, 2014

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

Suggested Citation

Massa, Massimo and Zhang, Lei, The Effects of Organizational Structure on Bond Investing: Do Bond Investors Behave like Banks? (September 1, 2014). Available at SSRN: https://ssrn.com/abstract=1328189 or http://dx.doi.org/10.2139/ssrn.1328189

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Lei Zhang (Contact Author)

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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