Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress

56 Pages Posted: Last revised: 13 Aug 2018

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Ha Nguyen

Indiana University, Kelley School of Business

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies

Wei Wang

Smith School of Business

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: July 18, 2018

Abstract

We study the effect of financial institutions’ simultaneous holdings — of loans and equity, bonds and equity, and loans, bonds, and equity — on the resolution of firms’ financial distress. Using a self-constructed comprehensive data set on out-of-court restructuring, we show that simultaneous holdings of debt and equity are associated with a significantly higher likelihood of out-of-court restructuring versus bankruptcy filing. Our identification relies on instrumental regressions and uses mergers of financial institutions as a source of exogenous shocks to the formation of simultaneous holdings. We also find that the effect of simultaneous holdings on out-of-court restructuring is stronger when the holders have larger equity stakes and when expected bankruptcy costs are higher. Taken together, this empirical evidence suggests that simultaneous holdings align the incentives of debt holders and equity holders to facilitate cost-effective workout.

Keywords: financial distress; bankruptcy; out-of-court restructuring; dual holding; loan; bond; equity

JEL Classification: G20, G30, G33

Suggested Citation

Chu, Yongqiang and Nguyen, Ha and Wang, Jun and Wang, Wei and Wang, Wenyu, Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress (July 18, 2018). Kelley School of Business Research Paper No. 18-66; 31st Australasian Finance and Banking Conference 2018. Available at SSRN: https://ssrn.com/abstract=3216923 or http://dx.doi.org/10.2139/ssrn.3216923

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Ha Nguyen

Indiana University, Kelley School of Business ( email )

1309 E 10th street
Bloomington, IN 47405-1701
United States

Jun Wang

University of Western Ontario - DAN Department of Management and Organizational Studies ( email )

Social Science Centre
London, Ontario N6A 5C2
Canada

Wei Wang (Contact Author)

Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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