Institutional investor horizons, information environment, and firm financing decisions

We provide evidence that the investment horizons of institutional shareholders affect firms' financing decisions. We find that short-term institutional ownership positively affects firms' likelihood of equity relative to debt issues, the size of equity issues, and the likelihood of longterm relative to short-term debt issues. Firms held more by short-term institutions have lower financial leverage and longer debt maturities. These results suggest that short-horizon institutions, backed by buy-side research, improve the transparency of the information environment, which allows firms to issue more information-sensitive securities. Our findings suggest that institutional investor horizons influence firms' financing decisions by shaping their information environment.