Institutional Investors, Capital Structure, and Financial Turmoil: A European Cross-Country Study

Abstract

This study examines the impact of institutional ownership on corporate financing decisions, particularly in the midst of financial turmoil. The dataset encompasses 8,049 firm-year observations from 1,138 non-financial firms listed in France, Germany, and the United Kingdom. The observation period ranges from January 2002 to December 2018. Employing a multiple structural break analysis and several multivariate regression models, the results illustrate a significantly negative influence of institutional ownership on the debt ratio. This impact amplifies during periods of financial turmoil, with a heightened effect observed in the post-crisis era compared to the pre-crisis period. Regarding institutional investors’ heterogeneity, this study also highlights substantial differences between grey and independent institutions, but not between domestic and foreign institutions. Additional empirical tests underscore the causality of the effect. These findings even withstand robustness checks, including a comprehensive set of firm-specific capital structure determinants, diverse investor type classifications, and various subsamples.