Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress
56 Pages Posted: Last revised: 13 Aug 2018
Date Written: July 18, 2018
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: Suggested Citation