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CFE-2: Corporate Debt
Shareholders as Creditors of First Resort
1University of Illinois at Chicago; 2Texas A&M University
We study firms' decisions to enter public bond markets for the first time (bond IPOs). We show that a firm’s ability to access the public bond market is greatly improved by the presence of "habitual dual holders" (HDHs) - financial conglomerates which have the tendency to simultaneously hold both equity and bonds of their portfolio firms - among its shareholders. HDHs are more likely to buy bonds in the IPO and take larger bond positions than bond investors without equity stake in the firm. Larger equity ownership by HDHs is associated with a larger fraction of the issue ending up in the hands of pre-IPO shareholders, lower offering yield spreads, more covenants overall, but fewer covenants restricting payout to shareholders. Our results suggest that coordination of decisions within financial groups reduces the segmentation between debt and equity markets, thus, facilitating firms' access to new sources of financing.
The Role of Subsidiary Debt for the Borrowing Cost of Diversified Firms
Goethe University Frankfurt
I exploit the introduction of a segment reporting reform in the US to investigate the role of subsidiary debt for the cost of borrowing of diversified firms. I find that diversified firms suffer a 17% increase in the cost of public debt when they centralize all the debt at the parent-firm level. On the contrary, when firms decentralize part of the debt at the subsidiary-firm level, the cost of borrowing does not increase. My findings show that subsidiary debt mitigates the free-cash-flow problem at the segment level, and therefore acts as a governance tool that reduces agency costs in diversified firms.
Do Changes in Lenders’ Monitoring Impact Timely Loss Recognition?
1Indiana University; 2Cornell University
We examine whether lenders can promote the revelation of bad news in firms' disclosure choices. We exploit a unique empirical setting whereby the defaults of unrelated borrowers (i.e., lender-side defaults) prompt lenders to update their monitoring standards and demand more bad news disclosure (i.e., disclosure that reveals bad news at a faster rate than good news). Bad news disclosure tightens existing covenants, but allows firms to maintain their access to credit. Overall, our findings are among the first to provide causal evidence regarding how lenders can exert control over firms through influencing their information environment.
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Conference: EFA 2017
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