Local Investors' Preferences and Capital Structure
48 Pages Posted: 29 Mar 2017 Last revised: 28 Jul 2018
Date Written: July 10, 2018
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: Suggested Citation