Institutional Equity Investors and Debt Maturity Structure: A Clientele Effect
45 Pages Posted: 27 May 2017 Last revised: 1 Aug 2018
Date Written: March 1, 2016
This paper provides empirical evidence of a clientele effect between institutional holdings and debt maturity structure. Using a new measure of debt maturity that captures the refinancing and underinvestment risks associated with the timing of cash flows, I find that institutional equity holders prefer to invest in firms with long debt maturity, and hence low refinancing risk, despite the agency-cost benefits associated with short term debt. I show that this relation is caused by the effect of refinancing risk on institutional holdings using a semi-natural experiment in which the 2007 credit crisis acts as a plausibly exogenous shock to firms’ abilities to secure external financing. Firms with high refinancing risk experience a drop in institutional holdings around this event, while institutional holdings increase in a propensity-score-matched sample of control firms. This effect is particularly strong in firms of intermediate quality, firms with moderately high leverage, and in firms with relatively good governance ex ante.
Keywords: Debt Maturity, Corporate Leverage; Institutional Investors; Active Institutions; Corporate Governance; Agency Costs; Financial Distress; Financial Stability; Capital Structure; Debt Structure; Financial Crisis; Refinancing Risk; Rollover Risk
JEL Classification: G3; G32; G33; G34
Suggested Citation: Suggested Citation