Investor-Driven Corporate Finance: Evidence from Insurance Markets

Abstract

I study the effect of bond investor demand on the financing and investment decisions of nonfinancial firms using granular data on the bond transactions of insurance companies. Liquidity inflows from insurance premiums combined with insurers’ persistent investment preferences identify bond demand shifts in the secondary market. These raise bond prices and reduce firms’ financing costs. In response, firms issue more bonds, especially when they have well-connected bond underwriters. The proceeds are used for investment activities, particularly by financially constrained firms. My findings emphasize that bond investors significantly affect corporate decisions through their price impact.