Small business of-interest and need-to-know.
Excerpt……….These results are not consistent with the view that dual holder premiums reflect unobservable risk. Instead, they suggest that equity holders receive additional compensation in terms of additional returns when they lend to firms for which they hold equity positions. There are several channels that would lead to these additional returns. It is possible that common ownership of equity and debt could reduce conflicts of interest between claimholders, leading to improved firm-level investment, or that participation by an equity holder could certify a firm’s quality to outside investors. However, these arguments predict that returns to all tranches of a loan will be higher, and do not explain differences in returns between tranches of the same loan. The within-loan results are better explained by a story in which equity holders receive compensation for participating in tranches that are relatively difficult to fill at times when it particularly important for the firm
Read full article……….via Equity-Holding Institutional Lenders — The Harvard Law School Forum on Corporate Governance and Financial Regulation.
