Local Investors' Preferences and Capital Structure

48 Pages Posted: 29 Mar 2017 Last revised: 28 Jul 2018

See all articles by Binay Adhikari

Binay Adhikari

University of Texas Rio Grande Valley

David C. Cicero

Harbert College of Business, Auburn University

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance

Date Written: July 10, 2018

Abstract

We provide evidence that publicly listed firms respond to capital supply conditions shaped by local investing preferences. The local supply of credit is higher and more stable in areas where demographics suggest that local investors prefer safer portfolios. We find that firms headquartered in these areas use more debt financing. The demographics-leverage relation is more pronounced for non-investment-grade and unrated firms that cannot easily tap public markets (about two-thirds of U.S. public companies). Analyses of firms’ financing activities around exogenous shocks to credit supplies - including interstate banking deregulation and the 2008-2009 financial crisis - support the capital supply effect. As demographics change slowly, local investors’ preferences may contribute to the heterogeneity and persistence of public firms’ capital structures.

Keywords: Investor Preferences, Local Demographics, Capital Structure, Segmented Markets, Fixed Income

JEL Classification: G01, G20, G21, G3, G32, N2

Suggested Citation

Adhikari, Binay Kumar and Cicero, David C. and Sulaeman, Johan, Local Investors' Preferences and Capital Structure (July 10, 2018). Available at SSRN: https://ssrn.com/abstract=2939135 or http://dx.doi.org/10.2139/ssrn.2939135

Binay Kumar Adhikari

University of Texas Rio Grande Valley ( email )

1201 W University Dr
Edinburg, TX 78539
United States
9566653827 (Phone)

David C. Cicero (Contact Author)

Harbert College of Business, Auburn University ( email )

415 Magnolia Ave.
Auburn, AL 36849
United States

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://sites.google.com/site/johansulaeman/

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