Financially Sophisticated Firms

Abstract

Using a newly comprehensive dataset that merges firm-level information with corporate bond issuance and holdings, we show that firms strategically use bond issuance not only to minimize their cost of capital but also to diversify their investor base. Investor specialization in certain bond characteristics allows firms to effectively shape their bondholder composition through issuance decisions. We find that firms with more diversified bondholder exhibit increased resilience to credit market shocks. Our analysis underscores the dual function of market timing in corporate bond issuance: it serves both to reduce capital costs and as a strategy for credit supply diversification. These findings emphasize the pivotal role of financially sophisticated firms in strategically issuing assets in a market increasingly reliant on non-bank intermediaries.

Keywords: Debt structure; debt heterogeneity; incomplete markets.

JEL Classification: G10, G12, G32