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

Abstract

We analyze whether institutional investors’ increasingly extensive corporate bond holdings are associated with how actively institutions vote and monitor their equity investments. We find 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 overall portfolio. Corporate bonds held in equity-focused funds and shareholder proposals that are more likely to require investors’ attention drive these findings. There is no evidence that creditor-shareholder conflicts explain these findings. Our results suggest that institutions’ bond holdings contribute to their overall incentive to be engaged monitors.

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

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