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Institutional investment horizon, the information environment, and firm credit risk

Lorne Switzer () and Jun Wang

Journal of Financial Stability, 2017, vol. 29, issue C, 57-71

Abstract: We provide evidence that the impact of the investment horizon of institutional investors on the credit risk of U.S. industrial firms is both statistically and economically significant. Ceteris paribus, a one percent point increase in the ownership by short-term (long-term) institutions leads to a 0.188 (.046) percentage point decrease (increase) of a firm’s credit spread during 2001–2011. However, during the financial crisis period of 2007/08, long-term institutional investors tend to reduce a firm’s credit risk, especially when a firm’s risk profile is high. Hence, long-term institutions play an important role in enhancing financial stability during the crisis period by mitigating risk.

Keywords: Credit default swaps; Institutional investors; Financial <; Gs4>; Crisis (search for similar items in EconPapers)
JEL-codes: G12 G20 G34 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jfs.2017.02.002

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