Institutional Investor Heterogeneity and Corporate Response to the Covid-19 Pandemic

We examine the role of institutional investors in determining firms’ decisions whether to reduce dividends and share buybacks during the Covid-19 pandemic. Our simple model predicts that the probability of cuts in payouts is linked to the holdings and types of institutions. We link our model to the attention-based theories of the firm. We posit that the highly proximate nature of the pandemic may encourage greater risk aversion in organizations. Consequently, the presence of institutions that actively engage with managers results in a reduction in shareholders’ payouts during the pandemic to enable firms to deal with increased uncertainty, while institutions that seek short-term value releases reduce the probability of cuts. We test our hypotheses using novel hand-collected data on shareholders’ payout cuts in the UK during the Covid-19 lockdown. We find that in firms with larger institutional holdings, shareholders’ payouts are more likely to be reduced as a response to the pandemic. However, institutional heterogeneity matters as institutions with a view to improve firms’ long-term growth are more likely to affect corporate payout decisions. In contrast, institutions that focus on regular income (e.g. pension funds) seem to resist cuts even in the aftermath of a severe exogenous shock like the Covid-19 pandemic.