Abstract

http://ssrn.com/abstract=1941902
 
 

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Do Institutional Investors Influence Capital Structure Decisions?


Roni Michaely


Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)

Christopher J. Vincent


Cornell University - Samuel Curtis Johnson Graduate School of Management

November 12, 2012

Johnson School Research Paper Series No. 54-2011

Abstract:     
This paper empirically investigates the relationship between institutional holdings and capital structure. Institutions may affect capital structure through their monitoring and information-gathering roles. At the same time, institutions may gravitate toward firms with specific capital structures, forming leverage-based investment clienteles. Using implied trades generated from mutual fund outflows as an instrument for institutional holdings, and a semi-natural experiment in which addition to the S&P 500 Index provides an exogenous shock to institutional holdings, we find that institutional holdings are a significant determinant of firms’ capital structures: A change in institutional holdings causes an opposite change in leverage. Moreover, using dynamic panel estimation, we find that while institutions affect capital structure decisions, changes in leverage do not affect institutional holdings, and there is no evidence of a clientele effect. Finally, we find that firms lower their leverage in response to increased institutional holdings by becoming more likely to issue equity, and less likely to increase debt. While our findings are consistent with models in which institutions substitute for debt by monitoring and reducing information asymmetry problems, further evidence suggests that the effect on asymmetric in-formation dominates.

Number of Pages in PDF File: 54

Keywords: Capital Structure, Institutions, Institutional Investors

JEL Classification: G32, G31, C23

working papers series


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Date posted: October 10, 2011 ; Last revised: November 13, 2012

Suggested Citation

Michaely, Roni and Vincent, Christopher J., Do Institutional Investors Influence Capital Structure Decisions? (November 12, 2012). Johnson School Research Paper Series No. 54-2011. Available at SSRN: http://ssrn.com/abstract=1941902 or http://dx.doi.org/10.2139/ssrn.1941902

Contact Information

Roni Michaely (Contact Author)
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
431 Sage Hall
Ithaca, NY 14853
United States
607-255-7209 (Phone)
607-254-4590 (Fax)
HOME PAGE: http://www.johnson.cornell.edu/faculty/profiles/Michaely/
Interdisciplinary Center (IDC)
P.O. Box 167
Herzliya, 46150
Israel
Christopher J. Vincent
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Ithaca, NY 14853
United States
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