The Mutual Friend: Dual Holder Monitoring and Firm Investment Efficiency

Forthcoming, Review of Corporate Finance Studies

43 Pages Posted: 25 Jul 2018 Last revised: 28 Sep 2019

See all articles by Miguel Anton

Miguel Anton

University of Navarra, IESE Business School

Luca Xianran Lin

HEC Montreal - Department of Finance; University of Navarra, IESE Business School

Date Written: July 1, 2019

Abstract

We investigate the influence of simultaneous equity holding by large creditors (dual holders) on investment efficiency in U.S. public firms. Such creditors have stronger incentives and power to monitor firm investment as they have cash flow and control rights from both the debt and the equity side. We provide evidence that dual holders, particularly non-commercial bank dual holders, significantly mitigate over-investment. For high growth firms and those subject to debt overhang, dual holders also alleviate the under-investment problem since they align shareholder and creditor incentives. Equity value increases at the presence of dual holders. Overall the evidence indicates that by improving firm investment efficiency, dual holders not only make creditor investments safer, but also create value for shareholders.

Keywords: Dual Holder, Corporate Investment, Corporate Governance, Agency Costs

JEL Classification: G23, G31, G34

Suggested Citation

Anton, Miguel and Lin, Luca Xianran, The Mutual Friend: Dual Holder Monitoring and Firm Investment Efficiency (July 1, 2019). Forthcoming, Review of Corporate Finance Studies, Available at SSRN: https://ssrn.com/abstract=3208242 or http://dx.doi.org/10.2139/ssrn.3208242

Miguel Anton

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

University of Navarra, IESE Business School ( email )

Avenida Pearson, 21
IESE Business School, H-300
Barcelona, Barcelona 08034
Spain

HOME PAGE: http://lucaxlin.com

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