Investor Demand for Leverage: Evidence from Equity Closed-End Funds

69 Pages Posted: 6 Nov 2018 Last revised: 18 Feb 2021

See all articles by Robert A. Dam

Robert A. Dam

University of Colorado at Boulder - Department of Finance

Shaun Davies

University of Colorado at Boulder - Leeds School of Business

S. Katie Moon

University of Colorado at Boulder - Leeds School of Business

Date Written: February 17, 2021

Abstract

We provide evidence that investors with leverage constraints demand leverage, for the sake of leverage. We study the equity closed-end fund (CEF) market and document a strong negative relation between fund leverage and CEF discounts, indicating that investors pay a relative premium for leverage. We show that leverage changes do not signal improved fund performance. Instead, the only benefit to investors of increased leverage is amplified exposure via greater volatility and risk exposure. We utilize a quasi-natural experiment to identify leverage as a causal driver of demand and provide external validity by relating our results to the betting-against-beta factor.

Keywords: Leverage constraints, leverage, closed-end funds

JEL Classification: G12, G14, G32

Suggested Citation

Dam, Robert A. and Davies, Shaun and Moon, Katie, Investor Demand for Leverage: Evidence from Equity Closed-End Funds (February 17, 2021). Available at SSRN: https://ssrn.com/abstract=3279748 or http://dx.doi.org/10.2139/ssrn.3279748

Robert A. Dam

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-492-2289 (Phone)

Shaun Davies (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Katie Moon

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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