Passive Debt Ownership and Corporate Financial Policy

Abstract

A recent dramatic rise in the assets managed by passive corporate debt funds has profound implications for firm financing and payout policy. I use fund-specific flows to isolate exogenous increases in firm-level passive debt ownership at a firm. Firms respond to higher levels of passive debt ownership by increasing leverage, consistent with a recapitalization. More passive debt ownership does not lead to risk-shifting, but rather an increase in direct payouts to shareholders. I show that passive debtholders facilitate these effects by reducing aggregate ex-ante and ex-post monitoring. The presence of a bank monitor mitigates the relationship between passive debt ownership and increased payout.

Keywords: Passive Investing, Index Funds, Corporate Debt, Capital Structure, Real Investment, Payout Decisions, Monitoring

JEL Classification: G23, G32, G34, G35