Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications

47 Pages Posted: 14 Aug 2008  

Henry T. C. Hu

University of Texas at Austin - School of Law

Bernard S. Black

Northwestern University - Pritzker School of Law; Northwestern University - Kellogg School of Management; European Corporate Governance Institute (ECGI)

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Abstract

We extend here our prior work, which focused on equity decoupling (Hu and Black, 2006, 2007, 2008), by providing a systematic treatment of debt decoupling and an initial exploration of hybrid decoupling. Equity decoupling involves unbundling of economic, voting, and sometimes other rights customarily associated with shares, often in ways that may permit avoidance of disclosure and other obligations. We discuss a new U.S. court decision which will likely curtail the use of equity decoupling strategies to avoid large shareholder disclosure rules. Debt decoupling involving the unbundling of the economic rights, contractual control rights, and legal and other rights normally associated with debt, through credit derivatives and securitisation. Corporations can have empty and hidden creditors, just as they can have empty and hidden shareholders. Hybrid decoupling across standard equity and debt categories is also possible. All forms of decoupling appear to be increasingly common. Debt decoupling can pose risks at the firm level for what can be termed debt governance the overall relationship between creditor and debtor, including creditors' exercise of contractual and legal rights with respect to firms and other borrowers. Widespread debt decoupling can also involve externalities and therefore create systemic financial risks; we explore those risks.

Suggested Citation

Hu, Henry T. C. and Black, Bernard S., Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications. European Financial Management, Vol. 14, Issue 4, pp. 663-709, September 2008. Available at SSRN: https://ssrn.com/abstract=1224101 or http://dx.doi.org/10.1111/j.1468-036X.2008.00450.x

Henry T. C. Hu (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1373 (Phone)
512-471-6988 (Fax)

Bernard S. Black

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

Northwestern University - Kellogg School of Management

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-5049 (Phone)

European Corporate Governance Institute (ECGI)

Brussels
Belgium

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