Institutional Investor Horizons, Information Environment, and Firm Financing Decisions
Xin (Simba) Chang
Cambridge Judge Business School; Nanyang Business School
Hong Kong Polytechnic University - Faculty of Business
Hong Kong University of Science & Technology (HKUST) - Department of Finance
April 19, 2012
25th Australasian Finance and Banking Conference 2012
We provide evidence that investment horizons of institutional shareholders affect firms’ financing decisions. We find that more short-term institutional ownership increases the likelihood of equity issues relative to debt issues, the size of equity issues, and the likelihood of long-term debt issues relative to short-term debt issues. These results suggest that short-horizon institutions, backed by buy-side research, improve the transparency of the information environment (e.g., through informed trading and monitoring via 'exit'), which allows firms to issue securities that are more sensitive to information asymmetry. Furthermore, short-horizon institutional ownership has stronger effects on firms’ financing decisions when sell-side analyst coverage is lower, indicating that buy-side information production substitutes for sell-side coverage when the latter becomes scarcer. Our results are robust to endogeneity of institutional ownership.
Number of Pages in PDF File: 64
Keywords: investor horizons, information asymmetry, capital structure, debt maturity, institutional ownership
JEL Classification: G32, D82, G20
Date posted: April 19, 2012 ; Last revised: September 30, 2012
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