Foreign Institutional Ownership and the Speed of Leverage Adjustment: International Evidence

An, Z.; Chen, C.; Lib, D.; Yin, C.

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.

Citation

An, Z., Chen, C., Lib, D., & Yin, C. (2021). Foreign Institutional Ownership and the Speed of Leverage Adjustment: International Evidence. Journal of Corporate Finance, 68, Article 101966. https://doi.org/10.1016/j.jcorpfin.2021.101966

• Journal Article Type: Article
• Acceptance Date: Apr 16, 2021
• Online Publication Date: Apr 23, 2021
• Publication Date: 2021-06
• Deposit Date: Apr 19, 2021
• Publicly Available Date: Apr 23, 2023
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 68
• Article Number: 101966
• DOI: https://doi.org/10.1016/j.jcorpfin.2021.101966
• Public URL: https://durham-repository.worktribe.com/output/1249573