The Impact of Introducing a (Nearly) Redundant Security: Evidence from Malaysian Corporate Bonds

Abstract

We develop a general equilibrium model in which firms issue nearly redundant securities to investor clienteles with participation constraints, with prices and demand determined endogenously in primary and secondary markets. The model characterizes how issuance costs, market frictions, and investor composition shape firms’ funding choices, equilibrium prices, and asset allocations. We test the model’s predictions using data from the Malaysian corporate bond market following the introduction of Islamic bonds. Consistent with the model, issuance decisions reflect trade-offs between collateral and liquidity benefits, Islamic and conventional bonds coexist without crowding out, and the expanded investor base increases access to debt financing. Show more