Institutional Investor Horizons, Information Environment, and Firm Financing Decisions
64 Pages Posted: 19 Apr 2012 Last revised: 30 Sep 2012
Date Written: April 19, 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.
Keywords: investor horizons, information asymmetry, capital structure, debt maturity, institutional ownership
JEL Classification: G32, D82, G20
Suggested Citation: Suggested Citation