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

53 Pages Posted: 14 Jul 2008 Last revised: 25 Jul 2011

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

Kai Li

University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)

Pei Shao

Date Written: June 1, 2009

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

Suggested Citation

Jiang, Wei and Li, Kai and Shao, Pei, When Shareholders are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Institutional Investors (June 1, 2009). EFA 2009 Bergen Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1159061 or http://dx.doi.org/10.2139/ssrn.1159061

Wei Jiang (Contact Author)

Columbia Business School - Finance and Economics ( email )

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Kai Li

University of British Columbia (UBC) - Sauder School of Business ( email )

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China Academy of Financial Research (CAFR)

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