Institutional corporate bond pricing

We propose an equilibrium corporate bond pricing model that accommodates the heterogeneity in institutional investors' preferences and mandates in an empirically tractable way. Our model, estimated on rich holdings data, quantifies investors' preferences and demand elasticities, with inelastic insurers focusing on the investment grade segment, and elastic mutual funds substituting across ratings groups. The model provides a novel quantitative perspective on the implications of recent trends in institutional ownership on equilibrium credit spreads, and thereby, on corporations' funding costs. Overall, our model emphasizes the composition of institutional demand as an important state variable for corporate bond pricing.