Mutual Fund Dual Holdings and Shareholder-Creditor Conflicts

Abstract

Mutual fund families increasingly hold bonds and stocks from the same firm. We study the implications of such dual holdings for corporate governance and firm decision-making by exploiting variations in dual ownership resulting from the rise in the popularity of bond mutual funds and from cross-family fund mergers. We present evidence of a reduction in shareholder-creditor conflicts, which allows firms to increase valuable investments and to refinance by issuing bonds with lower yields and fewer restrictive covenants. Overall, our results suggest that fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the benefits of such institutional ownership.