The impact of Institutional Shareholding on The Intensity of Debt Covenants

Abstract

Institutional investors represent an important part of U.S companies, and these companies need another source of a fund such as debt. My study focuses on examining the impact of institutional shareholding on the intensity of the debt covenants. In my research, I collected a sample of U.S. loans from the DealScan database, and these loans were issued to U.S. firms from 1995-2020. I examined how institutional ownership would impact the number of debt covenants in the loan contract, the number of general and financial covenants, also the covenant index that will be assigned for different types of existing debt covenants and other measures in the debt contracts like the measures of the probability of debt covenants violations. And the variable that was tested is the institutional shareholding, and I controlled for other variables. By depending on agency theory, my results indicate that the institutional shareholding positively affected the dependent variables of debt covenant. This means that the intensity of debt covenants will increase as the number of institutional shareholdings increase due to the lender concerns about agency problems