Luca Lin - Academia.edu (original) (raw)
Papers by Luca Lin
Journal of Corporate Finance
Using mergers between firms’ existing lenders as shocks to monitoring incentives and bargaining p... more Using mergers between firms’ existing lenders as shocks to monitoring incentives and bargaining power, I find that intensified lender monitoring significantly reduces borrowers’ public takeover activities. The effect is driven by mergers involving lead lenders, and becomes stronger for less bank-dependent firms with more risk-taking tendencies. Lender mergers reduce not only acquisitions that are value-destroying to shareholders but also value-enhancing ones. Deals that do happen on average create no additional shareholder value and target cash-rich firms with stable incomes. These results suggest that lender monitoring mitigates agency concerns, yet also leads to over-conservative firm behavior.
Existing studies show that common institutional ownership of multiple industry firms improves gov... more Existing studies show that common institutional ownership of multiple industry firms improves governance over management, because such common owners possess industry-wide information advantage and governance expertise. This paper studies whether creditors perceive common owners as allied monitors or potential powerful expropriators. I find that creditors impose less restrictive covenants on loans to firms with higher common ownership. A quasi-natural experiment using financial institution mergers suggests that the relationship is likely to be causal. This effect of common ownership is mainly pronounced in firms with more financial risk, weaker shareholder governance, and lower creditor bargaining power. Overall, these findings indicate that creditors benefit from better governance by common owners, and therefore exert less monitoring effort in firms with higher common ownership.
Diversified acquirer shareholders can profit from value-destroying acquisitions not only through ... more Diversified acquirer shareholders can profit from value-destroying acquisitions not only through their target stakes, but also through stakes in non-merging rival firms. Announcement losses are largely mitigated for the average acquirer shareholder when accounting for wealth effects on their rival stakes. Ownership by acquirer shareholders in non-merging rivals is negatively associated with deal quality and positively associated with deal completion. Funds with more rival ownership are more likely to vote in favor of the acquisition. Overall, these results show that many so-called “bad deals” are often in the interest of acquirer-firm shareholders.
SSRN Electronic Journal
Chinese banks, particularly the state-owned "Big Four" commercial banks, have significa... more Chinese banks, particularly the state-owned "Big Four" commercial banks, have significantly increased their presence in overseas syndicated loan markets over the past two decades. The Big Four are of great systemic importance as they are also the four largest banks globally by assets as in 2019. Previous evidence has heavily associated state ownership with bank inefficiency. Using borrower-time fixed effect to isolate demand-side factors, we show that foreign syndicated loans involving the Big Four have higher spreads than otherwise identical loans to the same borrowers during the same period, particularly in advanced economies. We find the opposite result in loans to Middle Eastern, Central Asian, and African Countries. Further analyses suggest that higher premia demanded by the Big Four are more likely to be explained by their increased profit sensitivity, with partial privatization and domestic banking market reform achieving success at least to some extent. Our evidence indicates that these megabanks could be becoming more efficient over time.
SSRN Electronic Journal
We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage... more We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage through short-sale constraints. Using mergers of financial institutions as a shock to dual ownership, we show that dual holdings of debt and equity increases equity lending supply and reduces short-sale constraints. Shareholders are also less likely to restrict lending supply before shareholder votes when dual holders are present. Further, dual holdings are associated with faster corrections of mispricing, consistent with lower shareholder-creditor conflicts enhancing market efficiency. Our results suggest that shareholder-creditor conflicts give rise to limits to arbitrage and have a real effect on market efficiency.
SSRN Electronic Journal
Prior studies show that creditors’ simultaneous equity holding mitigates shareholder-creditor con... more Prior studies show that creditors’ simultaneous equity holding mitigates shareholder-creditor conflict. We show that a new type of conflict arises in syndicates with such dual holders, due to the heterogeneity across syndicate members’ equity-to-loan positions. We find that loans with higher within-syndicate conflicts rely less on performance covenants, which serve as tripwires to facilitate ex-post control transfer from shareholders to creditors. Renegotiation is also less likely as conflict increases. Instead, high-conflict loans rely more on capital covenants, which align shareholder-creditor interests ex-ante and incentivize shareholders to monitor. Moreover, lead arrangers retain larger shares in high-conflict loans to commit to monitoring beyond contractual provisions. Finally, high-conflict loans tend to be smaller, shorter, and more costly.
The Review of Corporate Finance Studies
We investigate the influence of simultaneous equity holdings by creditors (dual holders) on inves... more We investigate the influence of simultaneous equity holdings by creditors (dual holders) on investment efficiency. Such creditors have stronger incentives and power to monitor firm investment as they have cash flow and control rights from both debt and equity sides. We provide evidence that dual holders, particularly noncommercial bank dual holders, significantly mitigate overinvestment. For high growth firms and those subject to debt overhang, dual holders also alleviate underinvestment. Equity value increases at the presence of dual holders. Our results indicate that by improving firm investment efficiency, dual holders not only make creditor investments safer but also create value for shareholders.
Journal of Corporate Finance
Using mergers between firms’ existing lenders as shocks to monitoring incentives and bargaining p... more Using mergers between firms’ existing lenders as shocks to monitoring incentives and bargaining power, I find that intensified lender monitoring significantly reduces borrowers’ public takeover activities. The effect is driven by mergers involving lead lenders, and becomes stronger for less bank-dependent firms with more risk-taking tendencies. Lender mergers reduce not only acquisitions that are value-destroying to shareholders but also value-enhancing ones. Deals that do happen on average create no additional shareholder value and target cash-rich firms with stable incomes. These results suggest that lender monitoring mitigates agency concerns, yet also leads to over-conservative firm behavior.
Existing studies show that common institutional ownership of multiple industry firms improves gov... more Existing studies show that common institutional ownership of multiple industry firms improves governance over management, because such common owners possess industry-wide information advantage and governance expertise. This paper studies whether creditors perceive common owners as allied monitors or potential powerful expropriators. I find that creditors impose less restrictive covenants on loans to firms with higher common ownership. A quasi-natural experiment using financial institution mergers suggests that the relationship is likely to be causal. This effect of common ownership is mainly pronounced in firms with more financial risk, weaker shareholder governance, and lower creditor bargaining power. Overall, these findings indicate that creditors benefit from better governance by common owners, and therefore exert less monitoring effort in firms with higher common ownership.
Diversified acquirer shareholders can profit from value-destroying acquisitions not only through ... more Diversified acquirer shareholders can profit from value-destroying acquisitions not only through their target stakes, but also through stakes in non-merging rival firms. Announcement losses are largely mitigated for the average acquirer shareholder when accounting for wealth effects on their rival stakes. Ownership by acquirer shareholders in non-merging rivals is negatively associated with deal quality and positively associated with deal completion. Funds with more rival ownership are more likely to vote in favor of the acquisition. Overall, these results show that many so-called “bad deals” are often in the interest of acquirer-firm shareholders.
SSRN Electronic Journal
Chinese banks, particularly the state-owned "Big Four" commercial banks, have significa... more Chinese banks, particularly the state-owned "Big Four" commercial banks, have significantly increased their presence in overseas syndicated loan markets over the past two decades. The Big Four are of great systemic importance as they are also the four largest banks globally by assets as in 2019. Previous evidence has heavily associated state ownership with bank inefficiency. Using borrower-time fixed effect to isolate demand-side factors, we show that foreign syndicated loans involving the Big Four have higher spreads than otherwise identical loans to the same borrowers during the same period, particularly in advanced economies. We find the opposite result in loans to Middle Eastern, Central Asian, and African Countries. Further analyses suggest that higher premia demanded by the Big Four are more likely to be explained by their increased profit sensitivity, with partial privatization and domestic banking market reform achieving success at least to some extent. Our evidence indicates that these megabanks could be becoming more efficient over time.
SSRN Electronic Journal
We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage... more We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage through short-sale constraints. Using mergers of financial institutions as a shock to dual ownership, we show that dual holdings of debt and equity increases equity lending supply and reduces short-sale constraints. Shareholders are also less likely to restrict lending supply before shareholder votes when dual holders are present. Further, dual holdings are associated with faster corrections of mispricing, consistent with lower shareholder-creditor conflicts enhancing market efficiency. Our results suggest that shareholder-creditor conflicts give rise to limits to arbitrage and have a real effect on market efficiency.
SSRN Electronic Journal
Prior studies show that creditors’ simultaneous equity holding mitigates shareholder-creditor con... more Prior studies show that creditors’ simultaneous equity holding mitigates shareholder-creditor conflict. We show that a new type of conflict arises in syndicates with such dual holders, due to the heterogeneity across syndicate members’ equity-to-loan positions. We find that loans with higher within-syndicate conflicts rely less on performance covenants, which serve as tripwires to facilitate ex-post control transfer from shareholders to creditors. Renegotiation is also less likely as conflict increases. Instead, high-conflict loans rely more on capital covenants, which align shareholder-creditor interests ex-ante and incentivize shareholders to monitor. Moreover, lead arrangers retain larger shares in high-conflict loans to commit to monitoring beyond contractual provisions. Finally, high-conflict loans tend to be smaller, shorter, and more costly.
The Review of Corporate Finance Studies
We investigate the influence of simultaneous equity holdings by creditors (dual holders) on inves... more We investigate the influence of simultaneous equity holdings by creditors (dual holders) on investment efficiency. Such creditors have stronger incentives and power to monitor firm investment as they have cash flow and control rights from both debt and equity sides. We provide evidence that dual holders, particularly noncommercial bank dual holders, significantly mitigate overinvestment. For high growth firms and those subject to debt overhang, dual holders also alleviate underinvestment. Equity value increases at the presence of dual holders. Our results indicate that by improving firm investment efficiency, dual holders not only make creditor investments safer but also create value for shareholders.