Institutional Dual-holders and Corporate Disclosures: A Natural Experiment

Abstract

This study examines the impact of the presence of institutional dual-holders, whose portfolios hold both loans and equity securities of the same firms, on those firms’ voluntary disclosures. Using mergers between institutional shareholders and lenders to the same firms as exogenous shocks to identify firms with institutional dual-holders that have high relative equity ownership, we document that such firms are less likely to provide management forecasts and disclose fewer voluntary 8-K items. In cross-sectional analyses, we find that the reduction in voluntary disclosures is more pronounced when institutional dual-holders have higher board representation and when firms have lower litigation risk. In addition, we find that firms with institutional dual-holders provide more private disclosures to their lenders via loan contract covenants. Additional analyses indicate that the impact of institutional dual-holders on corporate disclosures is driven by both their monitoring and trading incentives.

Keywords: institutional investors, dual-holders, corporate disclosures, monitoring, trading

JEL Classification: G21, G23, G34, M41