I examine the simultaneous associations between institutional ownership and capital structure of a firm. I find that a firm’s leverage decreases when institutional ownership increases. This result implies that a firm reduces its debt level as institutional monitoring substitutes for the external debt monitoring, and indirectly suggests institutional investors’ activism. More importantly, I also find that a firm’s suboptimal leverage increases when the institutional ownership increases, and institutional ownership decreases when a firm’s suboptimal leverage increases. This finding directly shows that institutional investors not only actively monitor the management but they also passively sell their shares when dissatisfied with the management. In addition, I find that the monitoring evidence on a firm’s leverage and suboptimal leverage are more pronounced when the institutional investors are less likely to have business relationships with a firm or the information asymmetry is high in the market.