Institutional blockholders, Agency problems and Corporate debt maturity

Abstract

This study examines the effect of institutional blockholders on corporate debt maturity for a sample of 280 French listed firms over the period 2002-2016. Consistent with a demand side story, we find that firm’s debt maturity is negatively related to the level of institutional investor holding, i.e., institutional blockholders use more short-term debt because of their active monitoring role. This result is robust to endogeneity concerns and to several sensitivity tests. Additional analysis shows that this effect is more pronounced in non family-controlled firms and for firms facing higher agency problems such as, high free cash flow, low product market competition and low analyst coverage. We also find that the relation between institutional investors and short term debt is significant only for financially unconstrained firms. Further analysis show that firms with large institutional investors benefit from lower debt costs, ruling out the supply side “reluctant creditor” explanation. Our findings provide significant implications for investors and policy makers.