Short-term institutional investors and agency costs of debt

Hyun Dong Kim, Yura Kim, Tomas Mantecon, Kyojik “Roy” Song

Research output: Contribution to journalArticlepeer-review

32 Scopus citations

Abstract

We conjecture that the presence of short-term institutional investors exacerbates agency conflicts between shareholders and creditors because short-term institutions might force firm managers to take myopic actions. Using the data on private debt to U.S. firms, we find that the investment horizons of institutional investors are negatively correlated with the number of loan covenants and loan spreads. We also document that short-term (long-term) institutional ownership is positively (negatively) correlated with the number of covenants, and that banks charge higher spreads on loans issued to firms with more short-term institutional ownership. These findings are consistent with our conjecture.

Original languageEnglish
Pages (from-to)195-210
Number of pages16
JournalJournal of Business Research
Volume95
DOIs
StatePublished - Feb 2019

Keywords

  • Agency cost
  • Bank loan
  • Covenant
  • Institutional investor
  • Investment horizon

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