Shareholder Financial Difficulties and Firms’ Risk-Shifting Behavior: Evidence from the 2003 Mutual Fund Scandal

47 Pages Posted: 10 Jun 2021

See all articles by Jun-Koo Kang

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Fangbo Si

Jinan University - Management School

Date Written: June 06, 2021

Abstract

We examine how shareholder financial difficulties affect firms’ risk-shifting behavior. Using the 2003 mutual fund scandal as a financial shock to institutions’ risk-shifting incentives, we find that lenders charge higher loan spreads after the scandal. The results are more evident when the scandal is more severe, when tainted institutions have poorer performance and stronger abilities to influence firms, and when firms have higher shareholder-debtholder conflict and greater information asymmetry. Lenders also impose more covenants after the scandal. We further find that bond and stock returns around scandal announcements are negatively correlated and that firms’ post-scandal investments and riskiness increase significantly.

Keywords: Risk shifting, Shareholder-debtholder conflict, 2003 mutual fund scandal, Cost of debt, Covenant, Tainted institution, Information asymmetry

JEL Classification: G21, G23, G32, M41

Suggested Citation

Kang, Jun-Koo and Si, Fangbo, Shareholder Financial Difficulties and Firms’ Risk-Shifting Behavior: Evidence from the 2003 Mutual Fund Scandal (June 06, 2021). Nanyang Business School Research Paper No. 21-18, Available at SSRN: https://ssrn.com/abstract=3863756 or http://dx.doi.org/10.2139/ssrn.3863756

Jun-Koo Kang (Contact Author)

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Fangbo Si

Jinan University - Management School ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

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