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

Robert Dam, Shaun William Davies and S Katie Moon

The Review of Asset Pricing Studies, 2024, vol. 14, issue 1, 1-39

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 positive relation between fund leverage and CEF premiums, indicating that investors pay a relative premium for leverage. We perform a quasi-natural experiment and identify leverage as a causal driver of the premium. 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 supply external validity by relating our results to the betting-against-beta factor. (JEL G12, G14, G32)

Date: 2024
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