Hostname: page-component-cd9895bd7-gxg78 Total loading time: 0 Render date: 2024-12-18T15:48:03.607Z Has data issue: false hasContentIssue false
  • English
  • Français

Institutional Debtholder Governance

Published online by Cambridge University Press:  04 August 2020

Aneel Keswani ,
Anh Tran  and
Paolo Volpin Open the ORCID record for Paolo Volpin [Opens in a new window]
Aneel Keswani
Affiliation:
City University of London Cass Business Schoola.keswani@city.ac.uk
Anh Tran
Affiliation:
City University of London Cass Business Schoolanh.tran@city.ac.uk
Paolo Volpin*
Affiliation:
City University of London Cass Business School
*
paolo.volpin.1@city.ac.uk (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Using data on the universe of U.S. based mutual funds, we find that two out of five fund families hold corporate bonds of firms in which they also own an equity stake. We show that the greater the fraction of debt a fund family holds in a given firm, the greater its propensity to vote in line with the interests of firm debtholders at shareholder meetings, even when against Institutional Shareholder Services (ISS) recommendation. Voting has direct policy consequences as firms that receive more votes in favor of creditors make corporate decisions more in line with the interests of debtholders.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 6 , September 2021 , pp. 2103 - 2135
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Pat Akey, Seth Armitage, Lucian Bebchuk, Bo Becker, Maria Boutchkova, Max Bruche, Walid Busaba, Kevin Crotty, Craig Doidge, Craig Dunbar, David Goldreich, Andrey Golubov Amit Goyal, Nandini Gupta, Bing Han, Neeltje van Horen, Wei Jiang, Tim Jenkinson, Dirk Jenter, Raymond Kan, Leora Klapper, Nam Le, Ulf von Lilienfeld-Toal, Lucy Liu, Ernst Maug, Joel Peress, Christopher Polk, Zacharias Sautner, Henri Servaes, Clemens Sialm, David Stolin, Javier Suarez, Josef Zechner, seminar participants at Cardiff University, Ivey Business School, Rotman School of Management, University of Edinburgh, University of Liverpool, University of Strathclyde, and conference participants at the 2018 Luxembourg Asset Management Summit and the 2019 Vietnam International Conference in Finance for comments and suggestions. We appreciate the constructive and insightful comments provided by an anonymous referee. All errors are our responsibility.

References

Aggarwal, R.; Erel, I.; Ferreira, M.; and Matos, P.. “Does Governance Travel Around the World? Evidence from Institutional Investors.” Journal of Financial Economics, 100 (2011), 154–181.CrossRefGoogle Scholar
Azar, J.; Schmalz, M. C.; and Tecu, I.. “Anticompetitive Effects of Common Ownership.” Journal of Finance, 73 (2018), 1513–1565.CrossRefGoogle Scholar
Becht, M.; Franks, J.; Mayer, C.; and Rossi, S.. “Returns to Shareholder Activism: Evidence from a Clinical Study of the Hermes UK Focus Fund.” Review of Financial Studies, 22 (2009), 3093–3129.CrossRefGoogle Scholar
Becker, B., and Strömberg, P.. “Fiduciary Duties and Equity--Debtholder Conflicts.” Review of Financial Studies, 25 (2012), 1931–1969.CrossRefGoogle Scholar
Bharath, S., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.CrossRefGoogle Scholar
Bodnaruk, A., and Rossi, M.. “Dual Ownership, Returns, and Voting in Mergers.” Journal of Financial Economics, 120 (2016), 58–80.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; and Kim, H.. “The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes.” Review of Financial Studies, 28 (2015), 2723–2769.CrossRefGoogle Scholar
Brav, A.; Jiang, W.; Partnoy, F.; and Thomas, R.. “Hedge Fund Activism, Corporate Governance, and Firm Performance.” Journal of Finance, 63 (2008), 1729–1775.CrossRefGoogle Scholar
Carleton, W.; Nelson, J.; and Weisbach, M.. “The Influence of Institutions on Corporate Governance Through Private Negotiations: Evidence from TIAA-CREF.” Journal of Finance, 53 (1998), 1335–1362.CrossRefGoogle Scholar
Chava, S.; Wang, R.; and Zou, H.. “Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies.” Journal of Financial and Quantitative Analysis, 54 (2019), 481–512.CrossRefGoogle Scholar
Chen, X.; Harford, J.; and Li, K.. “Monitoring: Which Institutions Matter?” Journal of Financial Economics, 86 (2007), 279–305.CrossRefGoogle Scholar
Chu, Y. “Shareholder--Creditor Conflict and Payout Policy: Evidence from Mergers Between Lenders and Shareholders.” Review of Financial Studies, 31 (2018), 3098–3121.CrossRefGoogle Scholar
Chu, Y.; Nguyen, H.; Wang, J.; Wang, W.; and Wang, W.. “Simultaneous Debt-Equity Holdings and the Resolution of Financial Distress.” Working Paper, Indiana University (2018).CrossRefGoogle Scholar
Clayton, M., and Reisel, N.. “Value Creation from Asset Sales: New Evidence from Bond and Stock Markets.” Journal of Corporate Finance, 22 (2013), 1–15.CrossRefGoogle Scholar
Cragg, J. G., and Donald, S. G.. “Testing Identifiability and Specification in Instrumental Variable Models.” Econometric Theory, 9 (1993), 222–240.CrossRefGoogle Scholar
DeFusco, R. A.; Johnson, R. R.; and Zorn, T. S.. “The Effect of Executive Stock Option Plans on Stockholders and Bondholders.” Journal of Finance, 45 (1990), 617–627.CrossRefGoogle Scholar
Dhillon, U. S., and Johnson, H.. “The Effect of Dividend Changes on Stock and Bond Prices.” Journal of Finance, 49 (1994), 81–289.CrossRefGoogle Scholar
Eberhart, A. C., and Siddique, A.. “The Long-Term Performance of CORPORATE Bonds (and stocks) Following Seasoned Equity Offerings.” Review of Financial Studies, 15 (2002), 1385–1406.CrossRefGoogle Scholar
Fich, E.; Harford, J.; and Tran, A. L.. “Motivated Monitors: The Importance of Institutional Investors′ Portfolio Weights.” Journal of Financial Economics, 118 (2015), 21–48.CrossRefGoogle Scholar
Gopalan, R., and Xie, K.. “Conglomerates and Industry Distress.” Review of Financial Studies, 24 (2011), 3642–3687.CrossRefGoogle Scholar
He, J., and Huang, J.. “Product Market Competition in a World of Cross Ownership: Evidence from Institutional Blockholdings.” Review of Financial Studies, 30 (2017), 2674–2718.CrossRefGoogle Scholar
Iliev, P., and Lowry, M.. “Are Mutual Funds Active Voters?” Review of Financial Studies, 28 (2015), 446–485.CrossRefGoogle Scholar
Jiang, W.; Li, K.; and Shao, P.. “When Shareholders are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Non-Commercial Banking Institutions.” Review of Financial Studies, 23 (2010), 3595–3637.CrossRefGoogle Scholar
Keswani, A.; Stolin, D.; and Tran, A. L.. “Frenemies: How Do Financial Firms Vote on Their Own Kind? Management Science, 63 (2017), 631–654.CrossRefGoogle Scholar
Matvos, G., and Ostrovsky, M.. “Cross-Ownership, Returns, and Voting in Mergers.” Journal of Financial Economics, 89 (2008), 391–403.CrossRefGoogle Scholar
Maxwell, W., and Rao, R.. “Do Spin-Offs Expropriate Wealth from Bondholders?” Journal of Finance, 58 (2003), 2087–2108.CrossRefGoogle Scholar
Opler, T., and Titman, S.. “Financial Distress and Corporate Performance.” Journal of Finance, 49 (1994), 1015–1040.CrossRefGoogle Scholar
Pensions and Investments. “Institutional Investors Own the Majority of the Stock Market” (April 2017).Google Scholar
Smith, M. P. “Shareholder Activism by Institutional Investors: Evidence from CalPERS.” Journal of Finance, 51 (1996), 227–252.CrossRefGoogle Scholar
Stock, J., and Watson, M.. “Dynamic Factor Models.” Working Paper, Princeton University (2010).Google Scholar
Stock, J., and Yogo, M.. “Testing for Weak Instruments in Linear IV Regression.” In Identification and Inference for Econometric Models: Essays in Honor of Thomas J. Rothenberg, Stock, J. H. and Andrews, D. W. K., eds. Cambridge, UK: Cambridge University Press (2005), 80–108.CrossRefGoogle Scholar
Wahal, S. “Pension Fund Activism and Firm Performance.” Journal of Financial and Quantitative Analysis, 31 (1996), 1–23.CrossRefGoogle Scholar
Wooldridge, J. M. “Econometric Analysis of Cross-Section and Panel Data.” Cambridge, MA:  MIT Press (2002).Google Scholar
Yang, H. “Institutional Dual Holdings and Risk Shifting: Evidence from Corporate Innovation.” Working Paper, University of Massachusetts (2019).Google Scholar