We analyze the heterogeneity in asset allocation decisions of different investor groups in response to changes in the macroeconomic environment. Using a new data set that includes the monthly portfolio holdings of private, commercial, and institutional investors deposited with Swiss banks, we estimate the relationship between equity and bond holdings and common business cycle indicators. Regression analysis indicates that private investors do not systematically move from stocks into bonds by selling stocks to institutional investors and purchasing bonds from them in adverse macroeconomic states. A VAR-error correction framework including cointegration and error correction restrictions suggests that the investment behavior of commercial investors leads and private investors follow in their investment decisions only slowly over time. The asset allocation decisions of institutional investors are not affected by the actions of private and commercial investors. Our results refute a principle of “institutional irrelevance”.
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A dynamic adjustment model and panel methodology are used to investigate the determinants of a time varying target capital structure. Because firms may temporarily deviate from their target capital structure in the presence of adjustment costs, the adjustment process is also endogenized. Specifically, we analyse the impact of firm-specific characteristics as well as macroeconomic factors on the speed of adjustment to the target debt ratio. The sample comprises a panel of 90 Swiss firms over the years from 1991 to 2001. We document that faster growing firms and those that are further away from their optimal capital structure adjust more readily. The results also reveal interesting interrelations between the adjustment speed and well-known business cycle variables. Most important, the speed of adjustment is higher when the term spread is higher and when economic prospects are good.