Institutional Dual Holdings and Risk Shifting : Evidence from Corporate Innovation

This paper analyzes the impact of shareholder-creditor conflicts on corporate risk-taking. Specifically, I examine the role played by institutional dual-holders (i.e., those simultaneously holding the same firm's debt and equity) in corporate innovation. Baseline results show that firms held by dual-holders generate fewer but more valuable patents. To establish causality, I use a difference-in-differences approach based on financial institution mergers. Further analysis suggests that decreased sensitivity of managerial compensation to firm risk might be the possible channel. Overall, I provide new evidence that shareholder-creditor conflicts indeed exist and lead to risk-shifting, and that dual ownership can partially mitigate this problem