The Mutual Friend: Dual Holder Monitoring and Firm Investment Efficiency
The Review of Corporate Finance Studies, Volume 9, Issue 1, March 2020, Pages 81–115
43 Pages Posted: 25 Jul 2018 Last revised: 19 May 2021
Date Written: July 1, 2019
We investigate the influence of simultaneous equity holding by large creditors (dual holders) on investment efficiency in U.S. public firms. Such creditors have stronger incentives and power to monitor firm investment as they have cash flow and control rights from both the debt and the equity side. We provide evidence that dual holders, particularly non-commercial bank dual holders, significantly mitigate over-investment. For high growth firms and those subject to debt overhang, dual holders also alleviate the under-investment problem since they align shareholder and creditor incentives. Equity value increases at the presence of dual holders. Overall the evidence indicates that by improving firm investment efficiency, dual holders not only make creditor investments safer, but also create value for shareholders.
Keywords: Dual Holder, Corporate Investment, Corporate Governance, Agency Costs
JEL Classification: G23, G31, G34
Suggested Citation: Suggested Citation