When Shareholders are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Institutional Investors

Abstract

This paper provides a comprehensive analysis of a new and increasingly important phenomenon: the simultaneous holding of both equity and debt claims of the same company by non-bank institutional investors ("dual holders"). The presence of dual holders offers a unique opportunity to assess the existence and magnitude of shareholder-creditor conflicts. We find that syndicated loans with dual holder participation have loan yield spreads that are 13-20 basis points lower than those without. The difference is even greater after controlling for the selection effect. Further investigation of dual holders' investment horizons and changes in borrowers' credit quality lends support to the hypothesis that incentive alignment between shareholders and creditors plays an important role in lowering loan yield spreads.

Keywords: shareholder-debtholder conflicts, dual-holding, institutional investors, syndicated loans

JEL Classification: G20, G32