Abstract:*

Does the structure of the borrower’s equity ownership matter in debt contracting? This paper addresses this question by examining change in control clauses. These clauses are pervasive in loan contracts, yet their terms are not boilerplate. Examining 14,940 contracts, we document significant heterogeneity in the use and size of ownership caps, which limit large equity block formation. Overall, our evidence indicates that the way equity capital is distributed matter to lenders. Lenders set lower caps to mitigate risks arising from activism, takeovers, within-syndicate coordination costs, and power contests among shareholders. We confirm some of these effects using two quasi-natural experiments. Caps below 50% are associated with a drop in firm value but not in the cost of debt, consistent with exacerbated firm-manager agency costs. Finally, two findings shed light on ways creditors may influence corporate governance: the largest block size increases when these minority block restrictions expire, and the likelihood of withdrawing an announced buyback increases during the life of these loans.

*Co-authored with D. De Angelis (University of Houston) and R. Zufarov (University of Illinois)

General information:

Attendance to this seminar is possible by invitation only. Please send an e-mail to secbs-abs@uva.nl if your are interested in attending this seminar.