papers

Institutional equity investors shape corporate debt issuance due to their triple role as firm shareholders, key participants in the equity market, and informational conduits to the debt market. Among US non-financial public firms, a five percentage point increase in institutional equity shareholdings is associated with a 21% rise in debt issuance. Two novel mechanisms, information transmission and equity benchmarking from institutional equity investors, contribute to this relationship. I provide causal evidence by leveraging a regulatory change in mutual fund disclosure and variation in equity index benchmarking intensity as instrumental variable respectively. A general equilibrium model is developed in which equity investors, debt investors, and the firm interact, accounting for information transmission and benchmarking behavior. Counterfactual analyses show that eliminating the information channel reduces the magnitude of the relationship between debt issuance and institutional equity shareholdings by more than one-fifth. These findings highlight the importance of cross-market linkages and firms’ responses to investor characteristics in understanding equilibrium financing outcomes, an aspect not well understood by existing literature.