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Institutional investment horizon, the information environment, and firm credit risk

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  • Switzer, Lorne N.
  • Wang, Jun

Abstract

We provide evidence that the impact of the investment horizon of institutional investors on the credit risk of U.S. industrial firms is both statistically and economically significant. Ceteris paribus, a one percent point increase in the ownership by short-term (long-term) institutions leads to a 0.188 (.046) percentage point decrease (increase) of a firm’s credit spread during 2001–2011. However, during the financial crisis period of 2007/08, long-term institutional investors tend to reduce a firm’s credit risk, especially when a firm’s risk profile is high. Hence, long-term institutions play an important role in enhancing financial stability during the crisis period by mitigating risk.

Suggested Citation

  • Switzer, Lorne N. & Wang, Jun, 2017. "Institutional investment horizon, the information environment, and firm credit risk," Journal of Financial Stability, Elsevier, vol. 29(C), pages 57-71.
    • Handle: RePEc:eee:finsta:v:29:y:2017:i:c:p:57-71
    DOI: 10.1016/j.jfs.2017.02.002
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    More about this item

    Keywords

    Credit default swaps; Institutional investors; Financial <; Gs4>; Crisis;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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