Abstract
Because corporate sustainability enhances corporate governance principles, firms are increasing their efforts to provide transparency and public disclosure. These efforts inform the public about the relationship between corporate governance and sustainability. Well-informed shareholders know about this relationship, which is becoming more apparent over time. In this study, we empirically examined the possible bilateral relationships between institutional ownership and a firm’s capital structure. Methodologically, we used an instrumental variable approach and the two-step generalized method of moments. The implications of this study are two-fold. First, we found that a firm’s debt level was low if its institutional ownership level was high. Institutional monitoring may substitute for external debt monitoring, leading firms to employ low leverage. Second, we found that the level of institutional ownership was high if a firm’s debt level was high. This association suggests that institutional investors prefer high-leveraged firms because institutional owners decrease their monitoring costs through debt monitoring. In the long run, sustainable institutional ownership materially impacts the capital structures of firms.
Highlights
Decent corporate governance is important for both firms and society
A firm’s level of institutional ownership was negatively related to its level of debt. This result implies that institutional investors play a monitoring role, and that this monitoring can substitute for alternative monitoring by external debt holders
This positive association differs from the negative association described above, which emphasizes the importance of examining both directions of the relationship between institutional ownership and capital structure
Summary
Decent corporate governance is important for both firms and society. Corporate leaders earn the public’s trust by fostering a sound corporate governance environment. We found that a firm’s level of debt tended to be low when the level of institutional ownership was high This result implies that institutional investors help to reduce agency costs in a firm by substituting for the external debt monitoring role. We found that the level of institutional ownership tended to be high when a firm’s level of debt was high This relationship suggests that institutional investors prefer firms with high levels of debt, presumably because debt monitoring reduces their own monitoring costs. These findings contribute to the literature by identifying the influence of institutional investors on corporate debt policy and governance. The remainder of this paper proceeds as follows: Section 2 describes the data and methodology; Section 3 provides the empirical results; Section 4 concludes
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
