The Help that May Hurt: On the Link between Institutional Ownership and Cost of Debt Capital

34 Pages Posted: 19 Aug 2008 Last revised: 9 Nov 2008

See all articles by Ashley Wang

Ashley Wang

Board of Governors of the Federal Reserve System

Gaiyan Zhang

University of Missouri at Saint Louis - College of Business Administration

Date Written: August 17, 2008

Abstract

Recent literature has documented a link between institutional equity ownership (IO) to cost of debt capital, and interpreted it as a corporate governance effect. However, separate literature has also interpreted IO as information asymmetry proxy. Given the heterogeneity among IO and their different association with corporate governance and information asymmetry effects, here we look at equity ownership by various types of institutional investors, which allows us to distinguish between the two effects. Based on a most update-to-date and comprehensive bond pricing data spanning the past 20 years, we find that yield spreads narrow (widen) with an increase in the equity institutional group that is more (less) sensitive to information asymmetry and is least (most) expected to help improve corporate governance. The contrasting patterns between yield spreads and various IO persist after controlling for potential endogeneity and other information asymmetry measures. Overall, our findings provide strong support for information asymmetry effect on cost of debt, and highlight the importance of distinguishing various types of institutional investors.

Keywords: Cost of Debt, Institutional Equity Ownership, Information Asymmetry

JEL Classification: G12, G32

Suggested Citation

Wang, Ashley and Zhang, Gaiyan, The Help that May Hurt: On the Link between Institutional Ownership and Cost of Debt Capital (August 17, 2008). 21st Australasian Finance and Banking Conference 2008 Paper, Available at SSRN: https://ssrn.com/abstract=1232542 or http://dx.doi.org/10.2139/ssrn.1232542

Ashley Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Gaiyan Zhang

University of Missouri at Saint Louis - College of Business Administration ( email )

One University Blvd.
487 SSB
St. Louis, MO 63121
United States

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