Institutional Shareholder Distraction, Agency Conflicts, and the Cost of Debt

Posted: 12 Feb 2020 Last revised: 13 Nov 2020

See all articles by Sadok El Ghoul

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Sattar Mansi

Virginia Polytechnic Institute & State University

Hyo Jin Yoon

University of South Carolina

Date Written: January 15, 2020

Abstract

Using a new measure of shareholder inattention based on exogenous industry shocks to institutional investor portfolios, we document a positive and significant relation between firms with distracted institutional shareholders and the cost of debt financing. This effect is stronger for firms with more powerful CEOs, firms with higher information asymmetries, and firms operating in less competitive product markets. Further analysis suggests mechanisms that reduce the bondholder-shareholder conflict—namely, bond covenants and institutional dual holders—attenuate the increase in bond yield spreads resulting from greater shareholder distraction. The results are robust to controlling for alternative measures of inattention at the retail investor level, and for the presence of other external monitors such as credit rating agencies, financial analysts, and Big 4 auditors. Overall, our evidence lends empirical support to the notion that shareholder inattention in the equity has an incrementally negative effect on bond valuation.

Keywords: Inattention, Agency Conflicts, Bondholder–Shareholder Conflict, Cost of Debt

JEL Classification: G23, G34

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Mansi, Sattar and Yoon, Hyo Jin, Institutional Shareholder Distraction, Agency Conflicts, and the Cost of Debt (January 15, 2020). Available at SSRN: https://ssrn.com/abstract=3520239

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Sattar Mansi

Virginia Polytechnic Institute & State University ( email )

Hyo Jin Yoon

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
United States

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