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Managerial Ownership, Debt Policy, and the Impact of Institutional Holdings: An Agency Perspective

Listed author(s):
  • Chenchuramaiah T. Bathala
  • Kenneth P. Moon
  • Ramesh P. Rao

This study investigates the effects of' institutional ownership on the debt policy and managerial ownership of the firm. Earlier literature on the agency model of the firm widely recognizes that the use of managerial stock ownership and external debt play an important role in limiting agency conflicts and enhancing firm value. The literature also recognizes that external monitors, such as institutional investors, can serve a useful role in limiting agency problems in the firm. However, investigations into the usefulness of' these agency-conflict-reducing mechanisms have tended to treat each in isolation with little attempt to study the inter-relationships among them. This study examines the impact of institutional holdings on managerial ownership and debt policy in an integrated framework utilizing a simultaneous system of equations estimation procedure. The study hypothesizes that the use of debt and managerial stock ownership are inversely related to institutional ownership in the firm. The empirical evidence provided in this study is consistent with this hypothesis.

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Article provided by Financial Management Association in its journal Financial Management.

Volume (Year): 23 (1994)
Issue (Month): 3 (Fall)

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Handle: RePEc:fma:fmanag:bathala94
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