THESIS
2014
viii, 48 pages : illustrations ; 30 cm
Abstract
This paper provides a model to analyze a recently documented empirical phenomenon, the investors’
simultaneous holding of equity and debt stakes in one firm. The model formalizes the idea
that the existence of a dual holder could effectively reconcile the conflicts between debt holders
and shareholders and improve firm values. We argue that the dual holder’s risk-shifting incentive
could be eliminated when her debt-equity ratio exceeds some threshold, which is dependent on
the ownership structure of the firm. Moreover, the existence of a dual holder could be considered
as a credible commitment on ‘no-risk-shifting’ behaviors only if the dual holder has the power to
enforce her preferred decisions ex post. Further, we show that the dual holder’s debt stake will
increase her incen...[
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This paper provides a model to analyze a recently documented empirical phenomenon, the investors’
simultaneous holding of equity and debt stakes in one firm. The model formalizes the idea
that the existence of a dual holder could effectively reconcile the conflicts between debt holders
and shareholders and improve firm values. We argue that the dual holder’s risk-shifting incentive
could be eliminated when her debt-equity ratio exceeds some threshold, which is dependent on
the ownership structure of the firm. Moreover, the existence of a dual holder could be considered
as a credible commitment on ‘no-risk-shifting’ behaviors only if the dual holder has the power to
enforce her preferred decisions ex post. Further, we show that the dual holder’s debt stake will
increase her incentive to exert effort and improve the firm value, but it might impair the other pure
equity holders’ incentive to input efforts. The relative importance of the ‘Effort-Inducing’ effect on
the dual holder compared with the ‘Effort-Reducing’ effect on the pure equity holders is decreasing
in the ownership concentration degree of the pure equity holders.
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