How do Institutional Investors Influence Capital Structure Decisions? A Case of Malaysian Firms

According to the capital structure theories, agency costs and asymmetric information problems shape capital structure. Institutional investors by decreasing these capital market frictions can influence firm's capital structure. Employing a panel data including 237 main market Malaysian firms during 2002 to 2011, this paper tests how institutional investors influence the capital structure of firms, more by decreasing agency costs or reducing information asymmetry. The results of system GMM estimator indicate that institutional investors have a negative influence on capital structure and the influence is stronger in firms with high asymmetric information problem. This means institutional investors influence capital structure more by reducing asymmetric information problem. This study also reveals that institutional investors are not homogeneous. Pressure-sensitive institutions influence capital structure more through mitigating agency costs while the pressure-insensitive institutions more through decreasing asymmetric information problem.