Institutional investors and the cost of bank loans

Abstract

Purpose – The purpose of this paper is to investigate the impact of institutional investors on the cost of bank loans using US bank loan data from 1995 to 2012. Design/methodology/approach – The cost of bank loans is analyzed with regard to loan spreads, collateral requirements, and the number of prepayment covenants. Findings – This paper finds that, first, holding institutional ownership constant, institutional control is positively related to the cost of bank loans, implying that strong institutional control intensifies conflicts between large shareholders and lenders. Second, institutional holdings are negatively related to the cost of bank loans. These results indicate that institutional monitoring reduces the agency problem between shareholders and managers. Originality/value – This paper suggests that the trade-off between institutional monitoring and institutional control jointly determines the effect of institutional investors on the cost of bank loans. Moreover, lenders should consider large shareholders and their influence when making lending decisions.