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Do Shareholder Leverage Constraints Affect Debtholders?

Published online by Cambridge University Press:  30 October 2025

Xiaoran Huang ,
Massimo Massa  and
Lei Zhang
Xiaoran Huang
Affiliation:
Xiamen University School of Economics WISE hxr163820@xmu.edu.cn
Massimo Massa*
Affiliation:
INSEAD Finance Department
Lei Zhang
Affiliation:
City University of Hong Kong College of Business Department of Economics and Finance lzhan29@cityu.edu.hk
*
massimo.massa@insead.edu (corresponding author)
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Abstract

We examine the relationship between shareholder leverage constraints and corporate risk-taking, focusing on its impact on debtholders. Our findings show that mutual fund leverage constraints are related to more risk-taking activities of portfolio companies, inducing higher credit risk and greater risk-shifting concerns for the firms’ debtholders. In response, the debtholders raise borrowing costs and tighten lending conditions. These effects intensify for firms facing higher levels of conflict between debtholders and shareholders and when mutual funds exert greater influence over firms. Econometric analyses, including instrumental variable specifications and asset management company mergers, support a causal interpretation.

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Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 40
Copyright
© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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