Keeping a Foot in Both Camps: The Governance Role of Institutional Investors Holding Equity and Bonds of the Same Company

We study the factors that induce asset managers to hold both equity and bond positions in the same company (“twin ownership”), as well as the corporate finance implications of such a joint ownmership for the firms they hold. We show that twin ownership is determined by a tradeoff between the benefits of information acquisition and greater monitoring/enforcing that an equity stake confers to a bondholder, and the cost of portfolio concentration, which exposes the asset management company to financial fire sale risk. By focusing on the exogenous part of twin ownership induced by style fire sales, we show that twin owners induce less risk taking in the firms they invest. This is engeneered by lowering the incentive component of managerial compensation. By driving down firm risk, twin bond ownership allows firm to increase leverage. Twin ownership results into a greater probability of cash acquisitions, lower bidder abnormal stock returns around the acquisition announcement, and an increase in covenants protection following the acquisition itself. A higher level of twin bond ownership allows firms to issue bonds at lower discounts, as well as resulting in lower trading yields for the outstanding bonds. JEL Classification: G12, G3, G32