Abstract:
This paper investigates the monitoring effect of institutional ownership on managerial behaviors more particularly on the corporate leverage decision of corporations listed in London Stock Exchange. Previous literature on the agency model extensively recognizes that the use of both managerial ownership and debt play a very crucial role in limiting agency conflict and improving firm value. The literature further appreciates the role of institutional intervention in limiting the possibility of managerial selfish behavior which might temper with the value of the firm. However, literature recognizes that foreign institutional interventions have more positive impact on the agency conflict reduction process than their domestic counterpart. Using a sample of 300 UK large non-financial companies in FTSE All share Index represented by FTSE 350 from 2004-2009, this study investigates the usefulness of these agency-conflict-reducing mechanisms studying the inter-relationships among them by utilizing simultaneous systems of estimation procedure. The results of the study show that the predicted inverse relationship between debt and managerial stock ownership is more statistically significant for domestic owned firms than their foreign counterparts. This implies that foreign controlled firms are believed to have higher level of international activities which increases the agency cost of debt. It can therefore be emphasized that the use of more debt is more risky for foreign-controlled firms than for domestic owned firms. This is why it is more likely to find domestic –controlled firms having higher debt levels than foreign-controlled firms.
