Great Trees are Good for Shade: Creditor Monitoring Under Common Ownership

17 Pages Posted: 12 Nov 2018 Last revised: 10 Apr 2021

See all articles by Luca Xianran Lin

Luca Xianran Lin

HEC Montreal - Department of Finance; University of Navarra, IESE Business School

Date Written: May 1, 2020

Abstract

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

Lin, Luca Xianran, Great Trees are Good for Shade: Creditor Monitoring Under Common Ownership (May 1, 2020). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3269529 or http://dx.doi.org/10.2139/ssrn.3269529

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

University of Navarra, IESE Business School ( email )

Avenida Pearson, 21
IESE Business School, H-300
Barcelona, Barcelona 08034
Spain

HOME PAGE: http://lucaxlin.com

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