Bonds Lie in the Portfolio of the Beholder: Do Bonds Affect Equity Monitoring?

Abstract

We analyze whether institutional investors’ corporate bond holdings are associated with how actively they vote and monitor their equity investments. We document that institutions conduct more governance research and are less likely to follow proxy advisor vote recommendations for companies whose bonds represent a larger proportion of their portfolio. Consistent with bond holdings influencing how actively institutions monitor their equity investments, companies with low ESG scores, where credit-rating agencies are more likely to make negative risk assessments, and bonds held in mixed-asset funds, where fixed income managers are more likely to influence their equity counterparts, drive these findings. Creditor- shareholder conflicts cannot explain these patterns. Overall, our findings suggest that bond holdings contribute to institutions’ incentive to be engaged monitors.

Keywords: bonds, governance, institutional investors, attention, voting

JEL Classification: G23, G30, G32, G34, K22