Debt Issuance in the Era of Passive Investment

59 Pages Posted: 3 Apr 2018 Last revised: 13 Apr 2020

See all articles by Michele Dathan

Michele Dathan

Board of Governors of the Federal Reserve System; Board of Governors of the Federal Reserve System

Sergei Davydenko

University of Toronto - Finance Area

Date Written: April 11, 2020

Abstract

Passive bond funds provide predictable demand for newly issued corporate bonds included in popular indices. By issuing index-eligible bonds, firms can take advantage of this passive demand and improve bond characteristics unrelated to index eligibility. We find that higher passive demand increases firms' propensity to issue bonds, and results in larger bonds, lower spreads, longer maturities, and fewer covenants. Firms issue a disproportionate number of bonds with face value just sufficient to be included in major bond indices. Following an increase in the index size threshold, some firms withdraw from the bond market while others respond by issuing larger bonds.

Keywords: Debt financing; Corporate bonds; Passive investment; ETFs

JEL Classification: G32

Suggested Citation

Dathan, Michele and Davydenko, Sergei, Debt Issuance in the Era of Passive Investment (April 11, 2020). Available at SSRN: https://ssrn.com/abstract=3152612 or http://dx.doi.org/10.2139/ssrn.3152612

Michele Dathan (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sergei Davydenko

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

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