Institutional Ownership and Flexibility in Payout Policy: Evidence from the Financial Crisis

41 Pages Posted: 25 Apr 2017

See all articles by Imran Haque

Imran Haque

Texas A&M University - Department of Finance

Date Written: April 1, 2016

Abstract

I study the role of institutional stock ownership in facilitating flexibility in firms’ payout policy by examining payout reductions during the financial crisis of 2008-2009. Treating the financial crisis as a systemic, negative shock to firms’ access to capital markets, I find that firms with higher institutional holdings were more likely to reduce payout to their shareholders. The payout reduction is overwhelmingly driven by cuts in share repurchases attesting to the flexible nature of share repurchases as documented in the literature. The findings are robust to different measures of institutional ownership. I attempt to further examine the mechanism behind this effect by incorporating several proxies for information asymmetry in my analysis and conclude that the primary driver is the mitigation of information asymmetry brought about by increase in institutional shareholding. However, my findings are not inconsistent with institutional investors reducing agency conflicts between management and shareholders.

Keywords: Payout Policy, Information Asymmetry, Agency Conflicts, Financial Crisis, Institutional Investors

JEL Classification: G23, G35

Suggested Citation

Haque, Imran, Institutional Ownership and Flexibility in Payout Policy: Evidence from the Financial Crisis (April 1, 2016). Available at SSRN: https://ssrn.com/abstract=2957130 or http://dx.doi.org/10.2139/ssrn.2957130

Imran Haque (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

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