Captured Equity Holders and Risk Shifting

Abstract

I study how fund families’ simultaneous debt and equity holdings affect risk shifting by portfolio firms. Families generate more income from debt in one-third of their dual holding positions; I argue their equity in those positions is captured. Firms with more captured dual holders exhibit less risk-shifting behavior. To establish causality, I exploit cross-family fund acquisitions as plausibly exogenous shocks to firm-level captured dual holders. Finally, captured equity votes favor creditors of distressed firms, and CEOs of firms with more captured dual holders have lower risk-taking incentives. Overall, evidence in this paper suggests that fund families internalize risk-shifting effects.