Abstract
We show that a bank with investors holding simultaneously both its equity and bond (dual-holders) exhibits lower risk and superior performance. Using the 2007-9 financial crisis as a quasi-natural experiment, we find that the presence of dual-holders reduces risky investment and risky business portfolio choices. Dual-holders' influence is higher in more opaque banks, indicating that the mechanism of transmission is through a decrease in information asymmetry and a reduction in debtholder-shareholder conflict. This effect translates into higher unconditional and risk-adjusted stock returns. Our results have important normative implications in improving the stability of financial systems.
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