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Asian Review of Financial Research, Vol., No..
pp.228~281
pp.228~281
Do Institutional Investors Monitor Management? Evidence from the Association between Institutional Ownership and Capital Structure
Chune Young Chung College of Business Administration, Kookmin University
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.
Chune Young Chung
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.