Transient Institutional Ownership, Costly External Finance, and Corporate Cash Holdings

We investigate how transient institutional ownership influences the level and value of cash holdings. We show that transient institutional ownership has a positive effect on cash holdings, and this linkage is more pronounced when stock and credit market conditions are less favorable. Using a regression discontinuity design exploiting the Russell 1000/2000 index reconstitution as an exogenous shock to transient institutional ownership, we show that the effects are causal. Transient institutions exacerbate debt-holder-shareholder conflicts (e.g., short-termism) and increase stock price crash risk, thereby increasing the cost of debt. Overall, our results suggest that transient institutions make cash holdings more valuable because financing by debt becomes more costly.