Transient institutional ownership, costly external finance and corporate cash holdings

Abstract We investigate and robustly show that transient institutional ownership (IO) has a positive effect on the level and value of corporate cash holdings. Further, using a regression discontinuity design exploiting the Russell 1000/2000 index reconstitution as an exogenous shock to transient IO, we show that the effects of transient IO on cash holdings are causal. Additionally, our analysis shows that transient institutions exacerbate debtholder–shareholder conflicts, 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.