Do Institutional Investors Demand Lower Cost Stickiness?

Abstract

This study explores the association between institutional ownership and the degree of cost stickiness. We find that when institutional ownership is higher, costs are less sticky. This result supports the argument that compared with individual investors, institutional investors are more likely to demand lower cost stickiness for mitigating the agency problems of empire building behaviors. We also find that the above association originates from the institutions that are likely to monitor managers (We name this type of institutions investors as institutional monitors). Furthermore, the negative association between ownership by institutional monitors and cost stickiness is stronger among the firms where managers have more opportunities to access resources based on available cash flows and their tenures. This result is consistent with the notion that when managers have more opportunities to empire build, institutional monitors tend to monitor more heavily to keep the costs in check.