Does Institutional Ownership Affect the Cost of Bank Borrowing?

Abstract

Institutional ownership is negatively related, both statistically and economically, to the cost of loans. This relationship is stronger for firms with higher degrees of information asymmetry. Institutional investors play an active role in corporate governance by reducing the risk levels of their portfolio companies through effectively monitoring management. Institutional ownership has the tendency to increase the cost of loans due to the agency cost of debt. Overall, we find a significant and robust "U"-shaped relationship between institutional ownership and the cost of loans. Nevertheless, companies with institutional investors still pay significantly lower borrowing costs than companies without institutional shareholders.

Keywords: corporate governance, institutional ownership, banks

JEL Classification: G34, G21