Institutional Ownership and Credit Spreads: An Information Asymmetry Perspective
34 Pages Posted: 22 Mar 2007 Last revised: 2 Nov 2009
Date Written: June 17, 2009
Recent literature has documented a link between institutional equity ownership (IO) and cost of debt capital, and interpreted it as a corporate governance effect. However, institutional equity investors may also affect cost of debt through their influence on information asymmetry condition of firms. To distinguish between the two effects, we break down institutional investors into different groups: transient institutional investors (TRA) who are sensitive to information asymmetry but unlikely to participate in corporate governance, and the dedicated ones (DED)who act oppositely. Based on a most up-to-date and comprehensive bond data spanning the past 20 years, we find that credit spreads narrow (widen) with an increase in equity ownership by TRA (DED). The effects are most prominent among short-term bonds, bonds with lower ratings, higher leverage and higher volatilities. The results persist after controlling for potential endogeneity and other information asymmetry measures, and are unlikely due to an asset substitution effect. Overall, our findings provide strong support for the effect of information asymmetry on credit spread, and highlight the importance of distinguishing various types of institutional investors.
Keywords: Institutional ownership, credit spreads, information asymmetry, corporate governance
JEL Classification: G30, G32, G34, G23, G12, D82
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