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Abstract
Institutional ownership of U.S. equities increased from 9.4% in 1980 to 42.9% in 2009. This paper analyzes the indirect role of institutional investors in monitoring firm managers and in the process of shareholder wealth maximization. Institutional monitoring reduces the agency problem of free cash flow. Controlling for reverse causality, we find that increased institutional ownership results in lower leverage and dividend payout that consequently lead to greater cash holdings and firm value. The results are consistent with the free cash flow hypothesis and provide an alternative explanation for why firms hold so much cash and why debt and dividends have decreased during the last thirty years.
Original language | English |
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Pages (from-to) | 127-146 |
Number of pages | 20 |
Journal | International Review of Economics and Finance |
Volume | 52 |
DOIs | |
Publication status | Published - 1 Nov 2017 |
Keywords
- Agency problem
- Free cash flow hypothesis
- Institutional ownership
- Cash holdings
- Capital structure
- Dividends
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Dive into the research topics of 'How institutional monitoring creates value: evidence for the free cash flow hypothesis'. Together they form a unique fingerprint.Activities
- 3 Invited talk
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How Institutional Monitoring Creates Value: Evidence for the Free Cash Flow Hypothesis
Fan Yu (Speaker)
2014Activity: Talk or presentation › Invited talk
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A Test of the Free Cash Flow Hypothesis: The Impact of Increased Institutional Holdings on Firm Characteristics
Fan Yu (Speaker)
6 Jul 2011Activity: Talk or presentation › Invited talk
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A Test of the Free Cash Flow Hypothesis: The Impact of Increased Institutional Holdings on Firm Characteristics
Fan Yu (Speaker)
15 Sept 2011 → 18 Sept 2011Activity: Talk or presentation › Invited talk