Mutual Fund Dual Holdings and Shareholder-Creditor Conflicts

50 Pages Posted: 15 Jan 2021 Last revised: 30 Jan 2021

See all articles by Rex Wang Renjie

Rex Wang Renjie

VU Amsterdam; Tinbergen Institute

Shuo Xia

Halle Institute for Economic Research; University of Leipzig - Faculty of Economics and Management Science

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: January 30, 2021

Abstract

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

Wang, Renjie and Xia, Shuo and Verwijmeren, Patrick, Mutual Fund Dual Holdings and Shareholder-Creditor Conflicts (January 30, 2021). Available at SSRN: https://ssrn.com/abstract=3735058 or http://dx.doi.org/10.2139/ssrn.3735058

Renjie Wang (Contact Author)

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31205986768 (Phone)

HOME PAGE: http://rexwangrenjie.weebly.com/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Shuo Xia

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

University of Leipzig - Faculty of Economics and Management Science ( email )

Leipzig, 04109
Germany

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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