Institutional investors, heterogeneity, and capital structure decisions: Evidence from an emerging market

Abstract

This paper uses data on Chinese A-share listed firms from 2008 to 2020 to examine the effect of institutional investors on capital structure by considering different types of institutional investors and firms. The results find that institutional investor shareholdings have a significant negative effect on capital structure. Further, compared with pressure-sensitive institutional investors, pressure-resistant institutional investors have a stronger negative effect on capital structure. And compared with non-state-owned firms, institutional investors have a stronger negative effect on the capital structure of state-owned firms. Institutional investors lower firm leverage by decreasing agency costs (governance channels) and reducing information asymmetry (information channels), and the effect of governance channels dominates. Finally, firms become more likely to reduce debt than issue equity to lower leverage in response to increased institutional investor shareholdings. These findings shed light on the role of institutional investors in capital structure decisions in emerging markets.