Mutual Fund Dual Holdings and Shareholder-Creditor Conflicts
50 Pages Posted: 15 Jan 2021 Last revised: 30 Jan 2021
Date Written: January 30, 2021
We study the impacts of mutual fund families on corporate governance when they simultaneously hold bonds and stocks from the same firm. We present evidence that such dual holdings prevent debt overhang problems, allowing firms to increase valuable investments and refinance by issuing bonds with lower yields and fewer restrictive covenants. The effect is stronger for firms that would otherwise face financial constraints. We mitigate potential endogeneity concerns by exploiting plausibly exogenous variations in dual ownership from cross-family fund mergers. Overall, our results suggest that fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the benefits of such institutional ownership.
Keywords: Mutual fund, dual holding, investment, debt overhang
JEL Classification: G23, G30
Suggested Citation: Suggested Citation