Finance - Theses
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ItemCorporate bond market clientele( 2018)This thesis consists of two essays that explore research questions related to corporate bond market clientele. In the first essay, I examine the investment behaviour of corporate bond mutual funds, the fastest-growing clientele for corporate bonds in recent times. Specifically, I study the extent to which the funds’ investment decisions are driven by their investment mandates. In the second essay, I draw on anecdotal and empirical evidence that shows that clientele in corporate bond markets are fundamentally different from clientele in equity markets. I apply these insights to examine how corporate policy is affected by differences between corporate bond and equity investors’ pricing of risk. Theoretical and anecdotal evidence suggests that mandates are a key determinant of mutual fund investment behaviour. However, other evidence reveals that mandates are not legally binding, and funds may have incentives to deviate. In the first essay, I compare the investment expenditure of funds with different mandates within segments of the corporate bond market. The segments categorize bonds according to maturity or credit rating. I find that, in each segment, the funds that spend relatively more (less) are those whose mandates imply that they should invest more (less) in that segment. For example, if a fund states that it targets a longer portfolio maturity, the fund invests significantly more in long-term bonds, on average, relative to funds that target shorter portfolio maturities. These results apply not only to average investment expenditure, but also to how each incremental unit of flow is allocated across segments. Results hold in subsamples of secondary market bonds, as well as new issues, regardless of whether the issuer of a new bond is a firm in which the fund already invests. Overall, my findings suggest that the investment behaviour of corporate bond mutual funds is consistent with the funds’ mandates. In the second essay, I use a dynamic investment and financing model that accounts for differences between equity and corporate bond holders’ pricing of macroeconomic risk. In line with empirical and anecdotal evidence, I calibrate the bond investor’s price of risk to be unconditionally higher than the equity investor’s, as well as volatile and independent of the macroeconomy. Relative to a counterfactual scenario in which both investors price risk identically, average market (book) leverage is 2.8 (3.3) percentage points lower. These results reveal a new quantitatively significant channel to address the under-leverage puzzle. Also, in the scenario with heterogeneous risk pricing, firms issue equity more frequently as they substitute away from debt financing. Overall, relative to the scenario with homogenous risk pricing, firms exhibit a similar, albeit slightly lower, average rate of investment.
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ItemThe role of mutual funds in the real economy( 2016)This thesis studies the roles of equity mutual funds in the real economy. I review the literature and identify two channels through which mutual funds can exert influences on the real economy: first as informed financiers in the new equity issues market and second as informed traders in the secondary market. I then focus on the first channel and present a simple of model of mutual fund intermediation to show that when mutual funds have superior screening abilities relative to retail investors, the participation of mutual funds in new equity issues conveys information about the underlying productivity of the equity issuers and hence real economic output in the macroeconomy. Empirically I find that mutual fund participation in new equity issues predicts the sensitivity of output to new issues, at both the aggregate level and the industry level. In addition, smaller net fund flows are associated with a stronger sensitivity of output to fund participation, due to funds' reduced information costs when they have less capital. At the firm level, I find that mutual fund participation positively predicts the productivity growth of the seasoned equity issuers, providing supporting evidence for the screening explanation. The results in this thesis offer a novel perspective by showing a relation between mutual fund screening and the real economy.