Institutional investors’ activism and credit ratings

We study the link between institutional shareholdings and the quality of the credit ratings of the firms they hold in their investment portfolio. The study of the overall impact of institutional investor ownership yields mixed results while more consistent results are obtained when we take into account the heterogeneity of institutional investors. When we classify the institutional investors based on their degree of intervention and activism levels, we find that passive/inactive investors are associated with better-rated firms while active ones are associated with lower-rated firms. Thus, activist institutional investors believe that there is more value to be found at lowly rated firms. They are more likely to find cheap stocks among these firms that require both their financial and managerial inputs to progress. Passive investors, instead, tend to track market indices that consist of mostly highly rated firms.