Transient Institutional Ownership, Costly External Finance, and Corporate Cash Holdings

46 Pages Posted: 12 Feb 2020

See all articles by Hyun Joong Im

Hyun Joong Im

Peking University - HSBC Business School

Heungju Park

Sungkyunkwan University - SKK Business School

Shams Pathan

Curtin University; Financial Research Network (FIRN)

Robert W. Faff

University of Queensland

Date Written: January 18, 2020

Abstract

We investigate how transient institutional ownership influences the level and value of cash holdings. We show that transient institutional ownership has a positive effect on cash holdings, and this linkage is more pronounced when stock and credit market conditions are less favorable. Using a regression discontinuity design exploiting the Russell 1000/2000 index reconstitution as an exogenous shock to transient institutional ownership, we show that the effects are causal. Transient institutions exacerbate debt-holder-shareholder conflicts (e.g., short-termism) and increase stock price crash risk, thereby increasing the cost of debt. Overall, our results suggest that transient institutions make cash holdings more valuable because financing by debt becomes more costly.

Keywords: Transient Institutional Ownership, Cash Holdings, Debt-Holder-Shareholder Conflicts, Stock Price Crash Risk

JEL Classification: G23, G31, G32, G34

Suggested Citation

Im, Hyun Joong and Park, Heungju and Pathan, Shams and Faff, Robert W., Transient Institutional Ownership, Costly External Finance, and Corporate Cash Holdings (January 18, 2020). Available at SSRN: https://ssrn.com/abstract=3514174 or http://dx.doi.org/10.2139/ssrn.3514174

Hyun Joong Im (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, Guangdong 518055
China
+8675526033627 (Phone)

HOME PAGE: http://english.phbs.pku.edu.cn/content-627-63-1.html

Heungju Park

Sungkyunkwan University - SKK Business School ( email )

Seoul
Korea, Republic of (South Korea)

Shams Pathan

Curtin University ( email )

Kent Street
Bentley
Perth, WA WA 6102
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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