Blocking Block-Formation: Evidence from Private Loan Contracts

77 Pages Posted: 10 Jun 2019 Last revised: 14 Jul 2020

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

University of Illinois at Chicago

Date Written: July 13, 2020

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, activism and takeover threats, and within-syndicate coordination costs. We confirm some of these effects using two quasi-natural experiments. 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 and the likelihood of withdrawing an announced buyback increases during the life of the loan, 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 (July 13, 2020). 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

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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