The Corporate Investment Benefits of Mutual Fund Dual Holdings
Rex Wang Renjie, Patrick Verwijmeren, Shuo Xia
Journal of Financial and Quantitative Analysis,
forthcoming
Abstract
Mutual fund families increasingly hold bonds and stocks from the same firm. We present evidence that dual ownership allows firms to increase valuable investments and refinance by issuing bonds with lower yields and fewer restrictive covenants, especially when firms face financial distress. Dual holders also prevent overinvestment by firms with entrenched managers. Overall, our results suggest that mutual fund families internalize the agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.
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Creditor-control Rights and the Nonsynchronicity of Global CDS Markets
Iftekhar Hasan, Miriam Marra, Eliza Wu, Gaiyan Zhang
Review of Corporate Finance Studies,
forthcoming
Abstract
We analyze how creditor rights affect the nonsynchronicity of global corporate credit default swap spreads (CDS-NS). CDS-NS is negatively related to the country-level creditor-control rights, especially to the “restrictions on reorganization” component, where creditor-shareholder conflicts are high. The effect is concentrated in firms with high investment intensity, asset growth, information opacity, and risk. Pro-creditor bankruptcy reforms led to a decline in CDS-NS, indicating lower firm-specific idiosyncratic information being priced in credit markets. A strategic-disclosure incentive among debtors avoiding creditor intervention seems more dominant than the disciplining effect, suggesting how strengthening creditor rights affects power rebalancing between creditors and shareholders.
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05.09.2024 • 24/2024
Moderate economic growth in the world – German economy continues to stagnate
Production in Germany has been stagnating for two years and is roughly the same level as shortly before the outbreak of the pandemic. Investment of firms is particularly weak. An important reason for fewer investments is the sluggish export business. Private households are also holding back on consumption, mainly due to concerns about the longer-term economic outlook. According to the autumn forecast of the Halle Institute for Economic Research (IWH), gross domestic product in Germany is likely to stagnate in 2024 and to increase by 1.0% in 2025 as capacity utilisation normalises. In June, the IWH forecast had still assumed a growth of 0.3% in 2024 and of 1.5% in 2025. In East Germany, gross domestic product will increase by 0.3% this year and by 0.9% in 2025.
Oliver Holtemöller
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Credit Supply Shocks: Financing Real Growth or Takeovers?
Tobias Berg, Daniel Streitz, Michael Wedow
Review of Corporate Finance Studies,
No. 2,
2024
Abstract
How do firms invest when financial constraints are relaxed? We document that firms affected by a large positive credit supply shock predominantly increase borrowing for transaction-based purposes. These treated firms have larger asset and employment growth rates; however, growth entirely stems from the increased takeover activity. Announcement returns indicate a low quality of the credit-supply-induced takeover activity. These results offer the possibility that credit-driven growth can simply reflect redistribution, rather than net gains in assets or employment.
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Poison Bonds
Rex Wang Renjie, Shuo Xia
IWH Discussion Papers,
No. 3,
2024
Abstract
This paper documents the rise of “poison bonds”, which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% since mid-2000s. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Our analysis suggests that this practice entrenches incumbent managers and destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of −7.3% per year. Our findings have important implications for the agency theory of debt: (i) more debt may not discipline the management; and (ii) even without financial distress, managerial entrenchment can lead to agency conflicts between shareholders and creditors.
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German economy in transition ‒ weak momentum, low potential growth The Joint Economic Forecast Project Group forecasts a 0.1% decline in Germany's gross domestic product in 2024.…
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Green Investing, Information Asymmetry, and Capital Structure
Shasha Li, Biao Yang
IWH Discussion Papers,
No. 20,
2023
Abstract
We investigate how optimal attention allocation of green-motivated investors changes information asymmetry in financial markets and thus affects firms‘ financing costs. To guide our empirical analysis, we propose a model where investors with heterogeneous green preferences endogenously allocate limited attention to learn market-level or firm-specific fundamental shocks. We find that a higher fraction of green investors in the market leads to higher aggregate attention to green firms. This reduces the information asymmetry of green firms, leading to higher price informativeness and lower leverage. Moreover, the information asymmetry of brown firms and the market increases with the share of green investors. Therefore, greater green attention is associated with less market efficiency. We provide empirical evidence to support our model predictions using U.S. data. Our paper shows how the growing demand for sustainable investing shifts investors‘ attention and benefits eco-friendly firms.
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Centre for Evidence-based Policy Advice
Centre for Evidence-based Policy Advice (IWH-CEP) The Centre for Evidence-based Policy Advice (IWH-CEP) of the IWH was founded in 2014. It is a platform that bundles and…
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