Investor Demand for Leverage: Evidence from Equity Closed-End Funds

Review of Asset Pricing Studies (RAPS), forthcoming

85 Pages Posted: 6 Nov 2018 Last revised: 27 Jul 2023

See all articles by Robert A. Dam

Robert A. Dam

Northwestern University - Kellogg School of Management; University of Colorado at Boulder - Department of Finance

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

S. Katie Moon

University of Colorado at Boulder - Leeds School of Business

Date Written: July 5, 2023

Abstract

We provide evidence that investors with leverage constraints demand leverage for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. Leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We supply external validity by relating our results to the betting-against-beta factor.

Keywords: Leverage constraints, leverage, closed-end funds

JEL Classification: G12, G14, G32

Suggested Citation

Dam, Robert A. and Dam, Robert A. and Davies, Shaun and Moon, Katie, Investor Demand for Leverage: Evidence from Equity Closed-End Funds (July 5, 2023). Review of Asset Pricing Studies (RAPS), forthcoming, Available at SSRN: https://ssrn.com/abstract=3279748 or http://dx.doi.org/10.2139/ssrn.3279748

Robert A. Dam

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-2289 (Phone)

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Katie Moon

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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