Existing finance research has predominantly focused on the equity market and ignored the bond market. To bridge this gap, my dissertation largely focuses on the bond market, which is occupied by passive investors such as pension funds, insurance companies, and banks, and aims to shed light on the strategic roles played by passive investors. Traditionally in the literature, bond dealers and brokers are the main liquidity supplier in the bond market -- they satisfy other investors' demands for immediate execution of orders that trade in the opposite direction from most other investors. Such liquidity provision function nevertheless could be curtailed in bad times such as the great financial crisis or due to policy adjustments like the implementation of Dodd-Frank Act. Largely built on the intuition that insurers are a group of buy-and-hold investors with more stable operating cash flow than other institutional investors, I explore the role played by insurers, the larger institutional investors in the bond market, in the bond liquidity provision especially during bad times. These are issues addressed in the first two essays of my dissertation works. In the third essay, I study the effect of defined benefit pensions' funding constraints on corporates' earnings management incentives. In a large picture, this is well aligned with the "rainy day" argument -- the substantial reduction in the interest rates in the past three decades substantially inflate corporate pension liabilities, making the wealth constraint imposed by corporate pension obligations much more relevant. I provide more details of the three essays below.
The first essay demonstrates that as a group, insurers serve the role of rainy day liquidity providers during bad times and for bonds under selling pressures. Within insurers, however, there are ample differences in insurer operations, regulatory conditions, and investment styles, and their connections with dealers. Thus the second essay explores what types of insurers have higher liquidity provision ability and when they are more likely to provide liquidity. In the third essay, I focus on another type of inactive institutional investor -- defined-benefit pensions, and mainly examine how firms deal with the expanding pension liability problem given the lowering interest rate during recent decades.