Institutional Investors and Corporate Liquidity Management

Abstract

We examine how institutional investors influence corporate liquidity choice between cash versus bank lines of credit using a comprehensive data set of real estate investment trusts. While cash offers managers unconditional control rights, credit lines subject managers to bank monitoring and restrictive covenants. We find that firms use more bank credit lines relative to cash under the oversight of institutional investors, especially independent institutional investors with a long-term investment horizon. These findings suggest that institutional investors engage in agency monitoring and attenuate the managers’ propensity to keep excessive cash relative to credit lines. Moreover, the sensitivity of bank liquidity utilization to institutional ownership is increasing in firm credit risk, which suggests that a motivation of institutional investors is to rely on banks to control corporate risk taking.