Securities Lending and Corporate Financing : Evidence from Bond Issuance

The security lending market allows institutional investors, such as insurance companies, to lend out their holding assets in exchange for cash collateral, an important but understudied source of funding to conduct off-balance sheet transactions. Since these lenders are also primary investors of corporate bonds, we hypothesize that their lending preference on certain types of bonds can influence corporate financing policies. Indeed, we observe that lenders' preference for long-term bonds stimulates firms to issue more such bonds and helps boost bond prices. Analysis exploiting a quasi-experiment on the regulatory change of insurance companies in 2010 supports a causal interpretation. Our results shed new insight on the potential impact of security lending on corporate financing policies and bond pricing