Dual Ownership, Returns, and Voting in Merger

Among the major events of Drexel's Center for Corporate Governance is our annual academic conference featuring scholarly papers from top researchers around the world.  This year we had over 60 submissions competing for just 5 slots.  

One of the five papers selected for the conference is particularly relevant for our readers.  

Suppose you owned shares of a target firm and you were offered a healthy premia for your shares.  You might be inclined to vote for the deal.  Now suppose you also own the bonds of the target.  Before voting you'd need to consider the effects of the deal on your combined portfolio of the target's stocks and bonds.  The way you vote wouldn't just be influenced by your equity position.  Interestingly, there may be cases where your thoughts on the deal are different from that of a pure equity owner.  In particular, you might be willing to accept a lower premium for the equity if you also gained on the debt.

Now consider the fact that institutions are major  holder of a firms equity (typically more than 70% of a large firm) and that these institutions can also hold the target firm's debt.   You have the motivation for the paper  Dual Ownership, Returns, and Voting in Mergers by Andriy Bodnaruk and Marco Rossi  The abstract of the paper is below.  

 Dual Ownership, Returns, and Voting in Mergers 

Abstract 

We document that in M&As a significant proportion of targets’ equity is owned by financial institutions that simultaneously own targets’ bonds (“dual holders”). Targets with larger equity ownership by dual holders have lower M&A equity premia and larger abnormal bond returns, particularly when dual holders stand to benefit more from appreciation of their bond stakes, e.g., when their bond ownership in the target is large and the target credit rating is non-investment grade. Dual holders are more likely to vote in favor of the merger proposal. Our results suggest the presence of coordination of decisions within dual holding financial conglomerates in M&A targets. 

The complete paper can be downloaded here.

All the best,

Ralph