The Effect of Institution Ownership on Payout Policy A Regression Discontinuity Design Approach Reporter: Liu Siwen

1 2 3 4 5 CONTENTS Abstract Data and Methodology Main Results Alternative Explanations and Robustness tests 5 Conclusion

PART 01 Abstract

Abstract We Find that: Higher institutional ownership causes firms to pay more dividends and repurchase more shares. 1 We also find evidence of a causal effect on proxy voting, corporate investment, R&D, and equity issuance. 2 Agency models where concentrated ownership lowers the marginal cost of delegated monitoring. 3

PART 02 Data and Methodology Briefly discusses the empirical strategies, the data and the variables used in the tests.

Regression Discontinuity Methodology Data and Methodology Briefly discusses the empirical strategies, the data and the variables used in the tests. Data Our sample consists of the Russell 1000 and Russell 2000 index constituents from 1991 until 2008. Regression Discontinuity Methodology To measure the effect of the Russell index assignment on various firm policies, we implement a regression discontinuity methodology similar to Imbens and Lemieux (2008) and Lee and Lemieux (2010). Randomness of the Index Assignmengt an Float Adjustment Our research design relies on the conditions of regression discontinuity being well specified in our setting.

Main ResMain Results Main Resultsults PART 03 Main ResMain Results Main Resultsults Presents the main empirical results

institutional ownership Main Results 1 In this section we test whether the discontinuity in index weights around the Russell 1000/2000 threshold leads to a discontinuity in institutional ownership. Higher exposure to institutional ownership

Institutional Ownership and Main Results 2 Institutional Ownership and Payout Policy We test whether this difference in ownership has an effect on payout policy We can point to a causal effect of institutional ownership on dividend payment, share repurchases, and total payout. Institutional shareholders force managers to disgorge more cash to shareholders when they become owners of the firms for reasons exogenous to payout policy.

1. 2. Monitoring and the Agency Cost Hypothesis Main Results 3 We find that firms with low market-to-book ratio, low market-to-book and high cash flow firms, low profitability, high CEO compensation seem to drive the effect we observe in the overall sample. 1. We also find that firms with higher analyst coverage have slightly lower discontinuity estimates, and firms with high response to earnings surprises have lower higher discontinuity estimates. 2.

Institution type and active vs. passive monitoring Main Results 4 Institution type and active vs. passive monitoring We find that three quarters of the increase in institutional ownership comes from “transient institutional shareholders” as defined by Bushee(1998). Institutional ownership and other corporate policies Institutional ownership causes an increase in R&D investment, corporate investment, as well as equity financing.

Alternative Explanations and Robustness tests PART 04 Alternative Explanations and Robustness tests Discusses alternative explanations, robustness checks, and additional tests.

Alternative Explannations and Robustness Tests We examine several different regression discontinuity estimates. We conduct falsification tests on our dependent variables around the threshold. We use a number of alternative definitions of dividend, share repurchases, total payout, corporate investment, and financing variables.

PART 05 Concludes

Conclusion Conclusion 1. Conclusion 2. Conclusion 3. We find that higher institutional ownership causes an increase in the redistribution of cash to shareholders. Conclusion 2. We find that institutional ownership increases proxy-voting participation, and suggestive evidence that institutional ownership increases R&D expenses, corporate investment, and equity financing. Conclusion 3. Our results also suggest that stock markets have a large causal impact on the real economy: a random inclusion in a stock market index can have a significant influence on the managerial behavior and corporate policy.

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