Shareholder Advantage and Short-Term Leverage

Abstract: We find a correlational relationship between proxies of shareholder bargaining power and liquidation costs (indicating the value extraction ability of shareholders from debtholders in reorganization in default) and short-term leverage. Theoretical literature suggests to us that firms with higher shareholder advantage will reduce their short-term leverage to a greater extent than those with lower shareholder advantage (due to shareholders disliking commitment to rollover risk) in a systemic shock to bond market liquidity, i.e., that shareholder advantage determines short-term leverage. We fail to measure this, owing to an inability to identify a shock that only influenced bond market liquidity.