Real Effects of Corporate Bond ETF Ownership

Corporate bond ETFs provide stable funding to US companies, with real and pricing effects. Exogenous ETF rule changes establish a causal positive link between bond ETF ownership and R&D spending, with the effect being largest for speculative-grade issuers. The stable and passive features of ETF ownership translate into a pervasive and persistent reduction in firms' cost of debt, which enables especially financially constrained firms to further exploit their internal growth opportunities. A theoretical model incorporating institutional features of bond ETFs shows that sufficiently productive firms will optimally issue extra debt to ensure their bonds are ETF-eligible.