Does Institutional Ownership Affect the Cost of Bank Borrowing?

47 Pages Posted: 15 Sep 2006

See all articles by Gordon S. Roberts

Gordon S. Roberts

York University - Schulich School of Business

Lianzeng Edward Yuan

Cornerstone Research

Date Written: September 13, 2006

Abstract

Institutional ownership is negatively related, both statistically and economically, to the cost of loans. This relationship is stronger for firms with higher degrees of information asymmetry. Institutional investors play an active role in corporate governance by reducing the risk levels of their portfolio companies through effectively monitoring management. Institutional ownership has the tendency to increase the cost of loans due to the agency cost of debt. Overall, we find a significant and robust "U"-shaped relationship between institutional ownership and the cost of loans. Nevertheless, companies with institutional investors still pay significantly lower borrowing costs than companies without institutional shareholders.

Keywords: corporate governance, institutional ownership, banks

JEL Classification: G34, G21

Suggested Citation

Roberts, Gordon S. and Yuan, Lianzeng Edward, Does Institutional Ownership Affect the Cost of Bank Borrowing? (September 13, 2006). Available at SSRN: https://ssrn.com/abstract=930138 or http://dx.doi.org/10.2139/ssrn.930138

Gordon S. Roberts (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 x77953 (Phone)
416-736-5687 (Fax)

Lianzeng Edward Yuan

Cornerstone Research ( email )

599 Lexington Avenue
New York, NY 10022
United States

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