Foreign institutional ownership and the speed of leverage adjustment: international evidence

Zhe An, Chen Chen, Donghui Li, Chao Yin

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Employing a large sample of 7246 firms across 38 economies from 2000 to 2013, we show a positive relation between foreign institutional ownership (FIO) and firms' speed of leverage adjustment. This positive relation is concentrated for over-leveraged firms that need to decrease financial leverage to rebalance their capital structures. We validate our findings using a 2SLS regression and a DiD estimation to exploit the exogenous variations in FIO generated by the inclusion of MSCI membership and the passage of the JGTRRA. These results suggest that foreign institutional investors play an important monitoring role in mitigating agency conflicts between shareholders and managers. Overall, this paper lends support to the dynamic trade-off theory.

Original languageEnglish
Article number101966
Number of pages21
JournalJournal of Corporate Finance
Volume68
DOIs
Publication statusPublished - Jun 2021

Keywords

  • Foreign institutional ownership
  • Speed of leverage adjustment

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