Shareholders as Creditors of First Resort

Abstract

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.