Blocking Block-Formation: Evidence from Private Loan Contracts

64 Pages Posted: 10 Jun 2019 Last revised: 9 Aug 2019

See all articles by Brian Akins

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Rustam Zufarov

Rice University

Date Written: August 7, 2019

Abstract

Change in control 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. Lenders set lower caps to mitigate risks arising from power contests among shareholders, takeover threats, and coordination costs within the syndicate. Setting caps below 50% is associated with a drop in firm value, but not in the cost of debt, consistent with exacerbated firm-manager agency costs. Finally, largest block size increases when these restrictions expire, shedding new light on ways creditors may influence corporate governance.

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 (August 7, 2019). 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)

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

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

HOME PAGE: http://www.de-angelis.com

Rustam Zufarov

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
186
PlumX Metrics