Institutional Investor Horizons, Information Environment, and Firm Financing Decisions

64 Pages Posted: 19 Apr 2012 Last revised: 30 Sep 2012

Xin (Simba) Chang

Cambridge Judge Business School; Nanyang Business School

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Sudipto Dasgupta

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: April 19, 2012

Abstract

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

Chang, Xin (Simba) and Chen, Yangyang and Dasgupta, Sudipto, Institutional Investor Horizons, Information Environment, and Firm Financing Decisions (April 19, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2042476 or http://dx.doi.org/10.2139/ssrn.2042476

Xin Chang

Cambridge Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://sites.google.com/site/simbachangxin/

Nanyang Business School ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Yangyang Chen (Contact Author)

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Sudipto Dasgupta

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong
852-2358-7666 (Phone)
852-2358-1749 (Fax)

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