Securities Lending and Corporate Financing: Evidence from Bond Issuance

Abstract

The securities lending market allows institutional investors, such as insurance companies, to lend out asset holdings in exchange for cash collateral, an important but understudied channel of collateral management. Since securities lenders are also primary investors in corporate bonds, we hypothesize that their lending preference for certain types of bonds can influence corporate financing policies. Indeed, we observe that a higher lender preference for long-term bonds stimulates firms to issue more such bonds next year and helps boost future bond prices. The analysis exploiting a quasi-experiment that regulates insurance companies lending disclosures supports the causal interpretation. Our results shed new light on the potential impact of securities lending.

Keywords: securities lending, institutional investors, cost of capital, bond issuance, bond pricing, insurance companies

JEL Classification: G12, G2, G3