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

Are bank risk disclosures informative? Evidence from debt markets

“…BCRs have recently been expanded and attracted significant attention from financial market investors, debt issuers, analysts, regulators and policymakers seeking unbiased assessments of creditworthiness of banks, especially in murky information environments, where the credibility of the credit rating agencies has been questioned (Ashbaugh‐Skaife et al, 2006; Cavallo, Powell, & Rigobon, 2013; Iannotta, Nocera, & Resti, 2013; Lobo, Paugam, Stolowy, & Astolfi, 2017; Montes, Oliveira, & Mendonça, 2016; Salvador, Pastor, & de Guevara, 2014; Switzer & Wang, 2017).…”

The role of internal corporate governance mechanisms on default risk: A systematic review for different institutional settings

“…Under the price pressure hypothesis, these shareholders would increase credit risk due to their myopic behaviour. On the other hand, Switzer and Wang (2017) summarize another two theories on the relationship between long-term institutional shareholders and credit risk. Under the shared benefit hypothesis, these investors are expected to decrease credit risk due to their monitoring role, reducing managerial opportunistic behaviour.…”

“…This contradicts the findings in Akwaa-Sekyi and Gene (2017) and Barry et al (2011), who detect in a European sample an increasing effect of institutional ownership on credit risk. Switzer and Wang (2017) also differentiate between long-term and short-term institutional investors based on their aggregate portfolio turnover and presents different theories that explain the effect of both types of institutional owners on credit risk. Regarding short-term investors, under the improved information environment hypothesis, these shareholders are expected to decrease credit risk due to their greater transparency and monitoring via "exit", which help to reduce credit spreads.…”

“…There are two futures lines of research, common to all mechanisms, that do not appear in the table: the need to carry out more studies that explicitly analyse differences between financial and non-financial firms, and between the global financial crisis period and the non-crisis period. In the U.S., positive (negative) effect of long-term (shortterm) institutional investors on credit risk, but negative (positive) effect during the global financial crisis (Switzer and Wang, 2017).…”

“…There are seven papers that include the role that the 2008 financial crisis played in the relationship between ownership structure and credit risk. First, regarding institutional ownership, Switzer and Wang (2017) show, for the case of the U.S., a positive effect of long-term institutional investors on credit risk, but the opposite effect during the global financial crisis period. This result suggests that this type of owner lowers its risk by shifting incentives during the crisis, since it is more concerned with the firm's survival.…”