Do Shareholder Preferences Affect Corporate Policies? – Job Market Paper –

This paper examines the preferences of institutional investors for firm policies and the relationship between these preferences and firm decisions. I find that institutions exhibit systematic differences in their preferences for financial and investment policies of the firms they invest in. Furthermore, these preferences are related to subsequent changes in the financial and investment policies of firms. In particular, a firm is more likely to decrease (increase) its leverage ratio if its current leverage is higher (lower) than the preferences of its institutional shareholders. A firm is also more likely to increase (decrease) its investment if its current investment ratio is lower (higher) than the revealed preferences of its institutional shareholders. Overall, the evidence in this paper suggests that the preferences of institutional shareholders are an important determinant of corporate policies