In Safe Hands: The Financial and Real Impact of Investor Composition Over the Credit Cycle

This paper demonstrates that investor base composition is an important determinant of bond price dynamics and capital allocation outcomes in response to aggregate credit cycle fluctuations. I use large-scale security-level holdings data and exploit variation in ownership bases across nearly identical bonds issued by the same firms to causally identify the elasticities of bond returns to investor base composition. In the U.S. corporate bond market, bonds held predominantly by domestic insurance companies rather than mutual funds suffer milder losses in crises: increasing insurer holdings in a bond by 50 percentage points leads to value losses in a market downturn that are 20% shallower. I implement a shift-share instrument to further sharpen the focus on identifying variation coming from idiosyncrasies in large insurers’ portfolio allocations at the time of bond issuance. These empirical patterns hold pervasively across countries. The results emerge from differences in the contractual structure of liabilities across intermediation sectors, in that insurers are less exposed to sudden, household-driven capital withdrawals. During crises, firms whose bonds are owned by investors less prone to fire sales face relatively better credit conditions: they maintain higher levels of borrowing, pay a lower cost of capital, and have higher real investment rates. I discuss implications for macro-prudential regulation.