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Supply uncertainty of the bond investor base and the leverage of the firm

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  • Massa, Massimo
  • Yasuda, Ayako
  • Zhang, Lei

Abstract

We examine the effect of the bond capital supply uncertainty of institutional investors (e.g., mutual bond funds and insurance companies) on the leverage of the firm using a novel data set. Our main finding is that the supply uncertainty of the firm's bond investor base — measured as (i) the average portfolio turnover, or (ii) the average flow volatility of investors holding the firm's bonds, or (iii) the prevalence of mutual funds among the firm's bondholders as opposed to insurance companies — has a negative and significant effect on the leverage of the firm. The supply uncertainty of the firm's bond investor base also has a negative and significant effect on the firm's probability of issuing bonds, and a positive and significant effect on the firm's probability of issuing equity and borrowing from banks. We take a multi-pronged approach to address potential endogeneity issues, including use of geography-based instruments and firm fixed effects, subsample analyses, and a placebo test. Our results highlight the fragility of access to the bond market for companies that depend on mutual funds with high turnover/ flow volatility as primary bond investors.

Suggested Citation

  • Massa, Massimo & Yasuda, Ayako & Zhang, Lei, 2013. "Supply uncertainty of the bond investor base and the leverage of the firm," Journal of Financial Economics, Elsevier, vol. 110(1), pages 185-214.
  • Handle: RePEc:eee:jfinec:v:110:y:2013:i:1:p:185-214
    DOI: 10.1016/j.jfineco.2013.04.011
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    Cited by:

    1. Bradley, Daniel & Pantzalis, Christos & Yuan, Xiaojing, 2016. "Policy risk, corporate political strategies, and the cost of debt," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 254-275.
    2. Florian Nagler & Giorgio Ottonello, 2017. "Structural Changes in Corporate Bond Underpricing," BAFFI CAREFIN Working Papers 1748, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. repec:eee:corfin:v:48:y:2018:i:c:p:34-48 is not listed on IDEAS
    4. Vikram Nanda & Wei Wu & Xing Zhou, 2017. "Investment Commonality across Insurance Companies : Fire Sale Risk and Corporate Yield Spreads," Finance and Economics Discussion Series 2017-069, Board of Governors of the Federal Reserve System (U.S.).
    5. repec:eco:journ1:2018-02-1 is not listed on IDEAS

    More about this item

    Keywords

    Institutional investors; Corporate bonds; Bond capital supply uncertainty; Capital structure; Investor base;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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