Institutional Investors, Heterogeneity, and Capital Structure Decisions: Evidence from an Emerging Market

This paper uses data of Chinese A-share listed firms from 2008 to 2020, and examines the effect of institutional investors on corporate capital structure by considering different types of institutional investors and different firm types. The results find that institutional investors have a significant negative effect on corporate capital structure, which reduce firm leverage. Further, compared with pressure-sensitive institutional investors, pressure-resistant institutional investors have a stronger negative effect on corporate capital structure. Compared with non state-owned firms, institutional investors have a stronger negative effect on state-owned firms’ capital structure. Moreover, institutional investors can reduce firm leverage by decreasing agency costs and information asymmetry. Finally, as institutional investors shareholdings increase, firms become more inclined to choose reducing debt financing than increasing equity financing to reduce leverage and adjust capital structure downward. These findings shed light on the important role of institutional investors in capital structure decisions in emerging markets.