RT Journal Article
SR Electronic
T1 Bond Market Demand and Capital Structure Variation
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 55
OP 75
DO 10.3905/jfi.2016.25.4.055
VO 25
IS 4
A1 Michael B. McDonald IV
YR 2016
UL https://pm-research.com/content/25/4/55.abstract
AB This article investigates whether firms vary the debt side of their capital structure based on changes in investor demand for bonds. Examining asset flows into various asset classes over the last 30 years reveals that companies respond to recent increases in demand for bonds from investors by altering their capital structure toward greater use of debt. Firms are more likely to issue debt when demand for bonds rises, and their use of debt increases (decreases) in periods when demand for bonds is high (low) compared with periods when demand is not significantly changed. Firms use more (less) debt when spreads between corporate yields and Treasury rates are low (high), consistent with efforts by managers to adjust their debt issuances based on relative debt costs. These results hold after controlling for seasonality, firm effects, and macroeconomic conditions. These findings suggest that investor demand for debt needs to be taken into account when examining the capital structure puzzle.TOPICS: Fixed income and structured finance, volatility measures