Institutional Debtholder Governance

Using data on the universe of U.S. based mutual funds, we find that two out of five fund families hold corporate bonds of firms in which they also own an equity stake. We show that the greater the fraction of debt a fund family holds in a given firm, the greater its propensity to vote in line with the interests of firm debtholders at shareholder meetings, even when against Institutional Shareholder Services (ISS) recommendation. Voting has direct policy consequences as firms that receive more votes in favor of creditors make corporate decisions more in line with the interests of debtholders.