Does ownership concentration affect corporate bond volatility?

Abstract

This paper analyzes the relation between ownership concentration and corporate bond volatility. We show that more concentrated mutual fund ownership is associated with higher volatility of corporate bonds. This relation is stronger among more illiquid bonds, during periods of heightened bond market illiquidity, and among bonds held by corporate bond funds that invest in more illiquid assets and experience higher or more correlated liquidity shocks. Using a sample of fund mergers, we further show that increases in bond volatility are not driven by the endogenous ownership structure of bonds, but rather the non-fundamental liquidity demand of large concentrated asset owners. Valuation Insight: Corporate bond holdings are highly concentrated in the holdings of institutional investors. This may lead to high volatility of corporate bond prices. The paper finds that this is indeed the case, esp. for more illiquid bonds and for bonds held by illiquid institutional investors. The non-fundamental liquidity demand of the institutional investors is found to be responsible for the corporate bond volatility. For valuation purposes, the price volatility of the bonds is not systematic and should not impact equilibrium bond values.