Tutorial 2: To what extent does the pattern of institutional ownership influence voting behaviour in instances of bond-equity holder conflicts under financial distress?

Question 1

How do institutional investors participate in governance of portfolio firms?

Answer 1

Institutional investors hold large no. of shares (equity) & corporate bonds (debt) in large corporations –> participate in governance of portfolio companies (individual companies held within larger investment portfolio), e.g. public vs private engagement, voting.

Question 2

How are institutional investors’ voting decisions affected by their debt-equity holding pattern under financial distress?

Answer 2

Institutional investors more likely to votes in favour of debtholder interests at shareholder meetings if holding corporate debts i.e. +ve corr between fund family debt fraction (proportion of bond investment relative to total firm investment) & propensity to vote in alignment w creditors , esp in financially distressed companies–> voters have a stake in firm’s debt so are inclined to consider interests of debtholders when voting on corporate decisions –> can extract more value in default scenario from their debt holdings compared to from their equity holdings so more likely to vote in alignment w debtholders.

–> Firms receiving more pro-debtholder votes from institutional investors tend to act more in interests of debtholders –> influences firms to prioritise debtholders’ concerns compared to shareholders in their decision-making processes where debt & equity interests conflict e.g. by influencing investments & dividend payout policies –> institutional investors’ voting behaviour may be affected by joint debt- equity holdings –> can shape firms’ policy actions & contribute to governance dynamics within associated portfolio companies.