Life Expectancy and Corporate Debt Markets

Abstract

Longevity shocks shift life insurers' demand for bonds of specific maturities. We show that these shifts have real consequences for a firm's financing and investment policies. Life insurance companies increase purchases of long-term bonds when longevity increases. Consequently, long-term bond yields fall. The corporate sector absorbs these shocks by shifting to long-term debt issuances, while increasing investments in long-term assets. The effects are particularly marked where life insurers are the primary holders of a firm's debt. The response is also more pronounced for firms that rely on long-term financing and those that are financially unconstrained.

Keywords: debt maturity, duration risk, bond yields, longevity risk, life insurance companies

JEL Classification: G12, G22, G32, J11