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Short-term institutional investors and agency costs of debt

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  • Kim, Hyun-Dong
  • Kim, Yura
  • Mantecon, Tomas
  • Song, Kyojik Roy

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.

Suggested Citation

  • Kim, Hyun-Dong & Kim, Yura & Mantecon, Tomas & Song, Kyojik Roy, 2019. "Short-term institutional investors and agency costs of debt," Journal of Business Research, Elsevier, vol. 95(C), pages 195-210.
    • Handle: RePEc:eee:jbrese:v:95:y:2019:i:c:p:195-210
    DOI: 10.1016/j.jbusres.2018.10.019
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    More about this item

    Keywords

    Bank loan; Covenant; Institutional investor; Investment horizon; Agency cost;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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