Foreign institutional ownership and the speed of leverage adjustment: International evidence

Zhe An; Chen Chen; Donghui Li; Chao Yin

doi:10.1016/j.jcorpfin.2021.101966

Foreign institutional ownership and the speed of leverage adjustment: International evidence

Zhe An, Chen Chen, Donghui Li^*, Chao Yin

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

Abstract

Employing a large sample of 7246 firms across 38 economies from 2000 to 2013, we show a positive relation between foreign institutional ownership (FIO) and firms' speed of leverage adjustment. This positive relation is concentrated for over-leveraged firms that need to decrease financial leverage to rebalance their capital structures. We validate our findings using a 2SLS regression and a DiD estimation to exploit the exogenous variations in FIO generated by the inclusion of MSCI membership and the passage of the JGTRRA. These results suggest that foreign institutional investors play an important monitoring role in mitigating agency conflicts between shareholders and managers. Overall, this paper lends support to the dynamic trade-off theory.

Original language	English
Article number	101966
Journal	Journal of Corporate Finance
Volume	68
Early online date	23 Apr 2021
DOIs	https://doi.org/10.1016/j.jcorpfin.2021.101966
Publication status	Published - Jun 2021

Keywords / Materials (for Non-textual outputs)

speed of leverage adjustment
foreign institutional ownership

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10.1016/j.jcorpfin.2021.101966

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title = "Foreign institutional ownership and the speed of leverage adjustment: International evidence",

abstract = "Employing a large sample of 7246 firms across 38 economies from 2000 to 2013, we show a positive relation between foreign institutional ownership (FIO) and firms' speed of leverage adjustment. This positive relation is concentrated for over-leveraged firms that need to decrease financial leverage to rebalance their capital structures. We validate our findings using a 2SLS regression and a DiD estimation to exploit the exogenous variations in FIO generated by the inclusion of MSCI membership and the passage of the JGTRRA. These results suggest that foreign institutional investors play an important monitoring role in mitigating agency conflicts between shareholders and managers. Overall, this paper lends support to the dynamic trade-off theory.",

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T1 - Foreign institutional ownership and the speed of leverage adjustment

T2 - International evidence

AU - An, Zhe

AU - Chen, Chen

AU - Li, Donghui

AU - Yin, Chao

PY - 2021/6

Y1 - 2021/6

N2 - Employing a large sample of 7246 firms across 38 economies from 2000 to 2013, we show a positive relation between foreign institutional ownership (FIO) and firms' speed of leverage adjustment. This positive relation is concentrated for over-leveraged firms that need to decrease financial leverage to rebalance their capital structures. We validate our findings using a 2SLS regression and a DiD estimation to exploit the exogenous variations in FIO generated by the inclusion of MSCI membership and the passage of the JGTRRA. These results suggest that foreign institutional investors play an important monitoring role in mitigating agency conflicts between shareholders and managers. Overall, this paper lends support to the dynamic trade-off theory.

AB - Employing a large sample of 7246 firms across 38 economies from 2000 to 2013, we show a positive relation between foreign institutional ownership (FIO) and firms' speed of leverage adjustment. This positive relation is concentrated for over-leveraged firms that need to decrease financial leverage to rebalance their capital structures. We validate our findings using a 2SLS regression and a DiD estimation to exploit the exogenous variations in FIO generated by the inclusion of MSCI membership and the passage of the JGTRRA. These results suggest that foreign institutional investors play an important monitoring role in mitigating agency conflicts between shareholders and managers. Overall, this paper lends support to the dynamic trade-off theory.

KW - speed of leverage adjustment

KW - foreign institutional ownership

U2 - 10.1016/j.jcorpfin.2021.101966

DO - 10.1016/j.jcorpfin.2021.101966

M3 - Article

SN - 0929-1199

VL - 68

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

M1 - 101966

ER -

Foreign institutional ownership and the speed of leverage adjustment: International evidence

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Keywords / Materials (for Non-textual outputs)

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