Foreign institutional ownership and the choice between public and private debt

The objective of this study is to examine the role of foreign institutional investors (FIIs) in firms’ choice between public and bank debt. Using a large sample of firms from 40 countries over 2004–2011, we find that foreign institutional ownership is positively associated with the propensity to access the public over the private debt market and the likelihood of subsequently issuing new public debt. In contrast, we find no relationship between domestic institutional ownership and the preference for public debt. Our results are robust to various specifications, including a 2SLS regression model in which several instruments are used, a change model for addressing reverse causality, a Heckman two-stage model and propensity score matching to correct for selection and omitted-variable biases, and a quasi-natural experiment using the exogenous relaxation of foreign equity restrictiveness. Cross-sectional tests further show that findings are stronger for firms with higher levels of information asymmetry, and firms domiciled in countries with weaker creditor protection regimes. Collectively, our findings suggest that FIIs play a vital role in facilitating firms’ public debt financing.