Supply Uncertainty of the Bond Investor Base and the Leverage of the Firm

61 Pages Posted: 6 Mar 2013 Last revised: 11 Jan 2015

Massimo Massa

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Lei Zhang

Nanyang Technological University (NTU)

Date Written: October 1, 2013

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.

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

JEL Classification: G1, G2

Suggested Citation

Massa, Massimo and Yasuda, Ayako and Zhang, Lei, Supply Uncertainty of the Bond Investor Base and the Leverage of the Firm (October 1, 2013). Journal of Financial Economics 110, 185–214.. Available at SSRN: https://ssrn.com/abstract=2228984

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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