Great Trees are Good for Shade: Creditor Monitoring Under Common Ownership
17 Pages Posted: 12 Nov 2018 Last revised: 10 Apr 2021
Date Written: May 1, 2020
Existing studies show that common ownership across multiple industry firms improves corporate governance, because such common owners internalize governance externalities and possess industry-wide expertise. I study whether creditors perceive common owners as allied monitors or powerful expropriators. Using financial institution mergers to establish causality, I find that creditors impose less restrictive covenants on loans to firms with higher common ownership. It is mainly pronounced in financially risky firms with no blockholder or lower creditor bargaining power. This indicates that creditors account for the benefits from common ownership governance, and therefore exert less monitoring effort in firms with higher common ownership.
Keywords: Creditor Monitoring, Common Ownership, Corporate Governance, Covenant Strictness
JEL Classification: G23, G32, G34
Suggested Citation: Suggested Citation