Investors are real: Tracing liquidity shocks from insurance markets to the real economy

Title: Investors are real: Tracing liquidity shocks from insurance markets to the real economy

Abstract: I document that insurance companies' demand for corporate bonds affects bond prices, non-financial firms' capital structure, and real outcomes. To measure bond demand, I exploit micro-level data on U.S. insurers and local insurance market outcomes which raise insurers' liquidity. Positive liquidity shocks increase insurers' bond demand and raise bond prices both on the secondary and primary bond market. Firms respond by increasing their bond debt. A $1 increase in bond demand results in a $5 increase in net bond issuance. The additional funding is used for acquisitions, which positively affects employment. These effects are muted when a firm’s underwriters are not connected with potential investors, revealing underwriters' role for information transmission in the bond market.