Simultaneous Equity-Debt Holdings and Corporate Disclosure

Description

The divergence in objectives between lenders and equity holders has drawn attention from theoretical research since the 1970s (Jensen and Meckling 1976; Myers 1977; Smith and Warner 1979; Leland 1994). Lenders have a fixed claim on firm value, whileequity holders have a residual claim. Shareholders, or managers acting on behalf of shareholders, possess the incentives to expropriate wealth from the creditors through taking more risks, which is commonly known as the asset substitution problem. Despiteprior theoretical work on the divergence in incentives between equity holders and creditors, empirical evidence on shareholder-creditor conflicts is relatively scarce and mixed. Emerging literature tries to shed light on the impact of incentive misalignment between shareholders and creditors through examining the simultaneous holding of equity and debt claims of the same firm (dual ownership or dual holding). For example, Jiang, Li and Shao (2010) and Chava, Wang and Zou (2019) propose that dual holders possess better aligned shareholder-creditor objectives, as manifested by lower loan yield spreads and less frequent use of capital expenditure restrictions in loan contracts. Chu (2018) finds that dual ownership reduces dividend payout. However, the literature has paid little attention to how dual holding affects corporate disclosure.To fill this void in the literature, this study tries to provide direct causal evidence on how  incentive conflicts between shareholders and debtholders affect corporate disclosures byexploiting mergers between lending banks and institutional investors of the same firmfollowing Chu (2018). It is important to examine this research question given the current debate on how lender and shareholder interactions affect corporate disclosures. Looking at debt covenant violations, Vashishtha (2014) contends that bank intervention benefits both creditors and shareholders by reducing managerial agency problems, thus shareholders delegate monitoring to creditors and demand fewer public disclosures. However, Christensen, Pei, Pierce and Tan (2019) hold the opposite view and argue thatcovenant violation intensifies shareholder-creditor conflicts, which induces higher shareholder scrutiny and accordingly improved disclosure quality. The dual holder merger creates negative shocks to the shareholder-creditor conflict, which provides a cleaner setting for testing how changes in shareholder-creditor conflicts affect corporate disclosures.