Leverage constraints and corporate financing decisions

We examine the impact of investors’ leverage constraints on corporate financing decisions. We use mutual fund flow to capture the net buying pressure from leverage‐constrained investors’ demand for high‐beta stocks. We show that firms confronted by the constrained funds’ excessive trading pressure are more likely to issue a seasoned equity offering and conduct stock‐based mergers and acquisitions, and their managers engage in more insider sales than those facing low or little trading pressure. Our results are robust to controlling for the short‐sales constraints of mutual funds and are consistent across different stages of the business cycle.