Institutional Ownership and Flexibility in Payout Policy: Evidence from the Financial Crisis

Abstract

I study the role of institutional stock ownership in facilitating flexibility in firms’ payout policy by examining payout reductions during the financial crisis of 2008-2009. Treating the financial crisis as a systemic, negative shock to firms’ access to capital markets, I find that firms with higher institutional holdings were more likely to reduce payout to their shareholders. The payout reduction is overwhelmingly driven by cuts in share repurchases attesting to the flexible nature of share repurchases as documented in the literature. The findings are robust to different measures of institutional ownership. I attempt to further examine the mechanism behind this effect by incorporating several proxies for information asymmetry in my analysis and conclude that the primary driver is the mitigation of information asymmetry brought about by increase in institutional shareholding. However, my findings are not inconsistent with institutional investors reducing agency conflicts between management and shareholders.