Institutional ownership of corporate bonds is highly concentrated. The largest five bondholders hold at least 40.4% of the amount outstanding of the average bond issue, making the bond market more concentrated than equities. Consistent with information acquisition costs, I document that bond ownership concentration increases with credit risk, but mostly among high-yield bonds, as investment-grade bonds are information insensitive. Conditional on credit risk, bond concentration decreases with firm transparency, but mostly among high-yield firms. To address endogeneity concerns, I find similar results when considering TRACE dissemination of historical bond trades as an exogenous shock to information acquisition costs. Borrowers with a concentrated investor base suffer from a higher cost of borrowing even after controlling for liquidity and credit risk. One standard deviation increase in pre-issuance bond concentration is associated with a 6 to 13 basis point increase in yield spread, translating to an extra cost of $2.5 million to $5.2 million for the median bond issuance.
Strategic Behavior Surrounding Sales of Mutual-Fund Management Companies,
with Zoran Ivković (Michigan State University) and Andrei Simonov (Michigan State University), MSU working paper
Predictable fund performance patterns surrounding mutual-fund management company sales suggest joint and strategic fund performance management. Consistent with a simple model we develop, return patterns in the period leading to the sale point to a decline in the cross-subsidization of star performers and an increase in the cross-subsidization of dud performers. The return patterns are more pronounced among funds with higher flow-performance sensitivity and fund management companies that engage in cross-trades. This paper is the first to document the event-driven dynamic nature of strategic cross-subsidization in the mutual-fund industry.
Nonbank lenders have been playing an increasingly important role in the supply of debt financing, especially post Great Recession. These nonbank financial institutions not only participate in syndicated loans to large businesses but also act as direct lenders to small and mid-sized businesses, providing loans previously were primarily supplied by banks. Moreover, the composition of bondholders has changed, with mutual funds and other less regulated entities having gained nontrivial market shares. What is the extent of nonbank lending? How important are the distortions associated with the varying degrees of regulatory oversight for banks that differentially limit risk-taking across alternative sources of credit? What are the financial stability implications of this transformed landscape of credit markets? This selective review addresses these important questions and also discusses how banks and nonbanks helped provide liquidity to the nonfinancial sector during the COVID-19 pandemic shock.