Shareholder-Creditor Conflicts and Equity Lending Behavior

Abstract

When shareholder-creditor conflicts are high and creditors have strong bargaining power, managerial actions can cater to creditor preference at the expense of shareholders. Using the presence of loan-equity dualholders as a measure of aligned shareholder-creditor incentives, we find that shareholders are more willing to lend shares to short sellers when concerns about creditor pressure are lower, particularly amid stronger ex-ante creditor bargaining power. Reduced frictions with creditors lead shareholders to recall shares less before voting events. Exploiting exogenous reductions in bank-affiliated dualholding resulting from the Volcker Rule, we find support that dualholders can causally affect short-sale constraints and arbitrage risk.

Keywords: Limits to Arbitrage, Dualholder, Shareholder-Creditor Conflict, Short Selling, Equity Lending, Price Efficiency G21, G30, G34

JEL Classification: G21, G30, G34