Investment Rating - The report does not explicitly provide an investment rating for the industry analyzed Core Insights - The paper investigates how shifts in investor demand, particularly from institutional investors, influence firm financing and investment decisions, utilizing a significant MSCI methodological reform as a case study [2][10][18] - The findings indicate that firms experiencing larger predicted inflows due to the MSCI rebalancing increased both equity and debt issuance, with a notable emphasis on debt financing [14][15][18] - The research highlights that institutional investor demand shocks not only affect asset prices but also significantly shape corporate financing and investment behaviors [18][22] Summary by Sections Introduction - The amount of assets managed by institutional investors has grown significantly, reaching 132% of global GDP by 2020, up from 84% in 2004, making them central to global capital allocation [7] - Increased demand for equities from institutional investors can lower firms' cost of equity capital, potentially expanding their investment capacity [7][9] Institutional Setting - The MSCI indexes are crucial benchmarks for institutional investors, with firms included in these indexes accounting for about 50% of total capital raised in equity and debt markets between 2010 and 2015 [25] The 2000-2002 Rebalancing - The MSCI rebalancing involved a shift from total to free-float market capitalization, affecting 2,508 firms across 49 countries, leading to significant changes in investor demand unrelated to firm performance [11][27] Changes in Investor Demand and Capital Raising Activity - Firms with positive predicted inflows raised significantly more capital post-reform, with a 1.5 percentage point increase in capital raised over market capitalization compared to firms with negative inflows [46] - The increase in issuance was evident in both equity and debt markets, with firms raising about 0.4 percentage points more equity and 0.8 percentage points more debt [47] Investment Responses - Firms with positive predicted inflows increased total investment by about 3 percentage points relative to firms with negative inflows after the reform, with significant increases in capital expenditures, mergers and acquisitions, and research and development [60][61] - The allocation of funds raised in capital markets showed that a median firm allocated approximately 62 cents to acquisitions for every dollar raised, indicating a strong focus on M&A [65]