When Shareholders Are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Institutional Investors
Coauthor(s): Kai Li, Pei Shao.
This paper provides a comprehensive analysis of a new and increasingly important phenomenon: the simultaneous holding of both equity and debt claims of the same company by nonbank institutional investors ("dual-holders"). The presence of dual-holders offers a unique opportunity to assess the existence and magnitude of shareholder-debtholder conflicts. We find that syndicated loans with dual-holder participation have loan yield spreads that are 12 to 22 basis points lower than those without, and the difference is even larger after controlling for the selection effect. Further investigation of dual-holders' investment horizon and changes in
borrowers' credit quality lends support to the hypothesis that better incentive alignment between shareholders and creditors is responsible for the lower loan yield spreads.
Source: Review of Financial Studies
Jiang, Wei, Kai Li, and Pei Shao. "When Shareholders Are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Institutional Investors." Review of Financial Studies (forthcoming).