Shareholders as Creditors of First Resort

Abstract

We show that a firm’s ability to access the public bond market for the first time is greatly improved when habitual dual holders (HDHs)—financial conglomerates that tend to simultaneously hold both equity and bonds of their portfolio firms—are among its shareholders. HDHs are more likely to buy bonds in a bond initial public offering (IPO) and to take larger bond positions than bond investors with no equity in the firm. Greater equity ownership by HDHs is associated with a higher fraction of the issue ending up in the hands of pre-IPO shareholders, lower offering yield spreads, and more covenants overall but fewer covenants that restrict payout to shareholders. This paper was accepted by Renee Adams, finance.