Blocking Block-Formation: Evidence from Private Loan Contracts

72 Pages Posted: 10 Jun 2019 Last revised: 26 Dec 2023

See all articles by Brian Akins

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

David De Angelis

University of Houston - C.T. Bauer College of Business

Rustam Zufarov

University of Illinois at Chicago

Date Written: October 06, 2024

Abstract

Does the structure of the borrower's equity ownership matter in debt contracting? This paper addresses this question by examining change in control clauses. These clauses are pervasive in loan contracts, yet their terms are not boilerplate. Examining 14,940 contracts, we document significant heterogeneity in the use and size of ownership caps, which limit large equity block formation. Overall, our evidence indicates that the way equity capital is distributed matters to lenders. Lenders set lower caps to mitigate risks arising from power contests among shareholders, formation of a new (coordinating) block, potentially resulting in activism, as well as hostile takeover threats via toehold strategies. We confirm some of these effects using two quasi-natural experiments. Caps below 50% are associated with a drop in firm value but not in the cost of debt, consistent with exacerbated firm-manager agency costs. Finally, two findings shed light on ways creditors may influence corporate governance: the largest block size increases when these minority block restrictions expire, and the likelihood of withdrawing an announced buyback increases during the life of these loans.

Keywords: Equity Block Formation, Change in Control, Debt Contracting

JEL Classification: G20, G32, G34

Suggested Citation

Akins, Brian K. and De Angelis, David and Zufarov, Rustam, Blocking Block-Formation: Evidence from Private Loan Contracts (October 06, 2024). Available at SSRN: https://ssrn.com/abstract=3393628 or http://dx.doi.org/10.2139/ssrn.3393628

Brian K. Akins

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

David De Angelis (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Rustam Zufarov

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
327
Abstract Views
2,114
Rank
199,147
PlumX Metrics