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Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications

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Author Info

  • Henry T. C. Hu
  • Bernard Black

Abstract

"We extend here our prior work, which focused on equity decoupling (Hu and Black, 2006, 2007, 2008), by providing a systematic treatment of debt decoupling and an initial exploration of hybrid decoupling. Equity decoupling involves unbundling of economic, voting, and sometimes other rights customarily associated with shares, often in ways that may permit avoidance of disclosure and other obligations. We discuss a new U.S. court decision which will likely curtail the use of equity decoupling strategies to avoid large shareholder disclosure rules. Debt decoupling involving the unbundling of the economic rights, contractual control rights, and legal and other rights normally associated with debt, through credit derivatives and securitisation. Corporations can have empty and hidden creditors, just as they can have empty and hidden shareholders. 'Hybrid decoupling' across standard equity and debt categories is also possible. All forms of decoupling appear to be increasingly common. Debt decoupling can pose risks at the firm level for what can be termed 'debt governance' - the overall relationship between creditor and debtor, including creditors' exercise of contractual and legal rights with respect to firms and other borrowers. Widespread debt decoupling can also involve externalities and therefore create systemic financial risks; we explore those risks." Copyright (c) 2008 Henry T. C. Hu Journal compilation (c) 2008 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 14 (2008)
Issue (Month): 4 ()
Pages: 663-709

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Handle: RePEc:bla:eufman:v:14:y:2008:i:4:p:663-709

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Cited by:
  1. Stefan Arping, 2012. "Credit Protection and Lending Relationships," Tinbergen Institute Discussion Papers 12-142/IV/DSF48, Tinbergen Institute.
  2. Campello, Murillo & Matta, Rafael, 2012. "Credit default swaps and risk-shifting," Economics Letters, Elsevier, vol. 117(3), pages 639-641.
  3. Bolton, Patrick & Oehmke, Martin, 2013. "Strategic conduct in credit derivative markets," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 652-658.
  4. Giovanni Calice & Christos Ioannidis & Julian Williams, 2012. "Credit Derivatives and the Default Risk of Large Complex Financial Institutions," Journal of Financial Services Research, Springer, vol. 42(1), pages 85-107, October.
  5. : Gi H. Kim, 2013. "Credit Default Swaps, Strategic Default, and the Cost of Corporate Debt," Working Papers wpn13-12, Warwick Business School, Finance Group.
  6. Andras Danis, 2013. "Do Empty Creditors Matter? Evidence from Distressed Exchange Offers," IEHAS Discussion Papers 1334, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  7. Satyajit Das & Malcolm Edey, 2008. "Wrap-up Discussion," RBA Annual Conference Volume, in: Paul Bloxham & Christopher Kent (ed.), Lessons from the Financial Turmoil of 2007 and 2008 Reserve Bank of Australia.
  8. Giovanni Calice & Christos Ioannidis & Julian Williams, 2011. "Credit Derivatives and the Default Risk of Large Complex Financial Institutions," CESifo Working Paper Series 3583, CESifo Group Munich.
  9. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
  10. McDonald, Robert L., 2013. "Contingent capital with a dual price trigger," Journal of Financial Stability, Elsevier, vol. 9(2), pages 230-241.
  11. Stefan Arping, 2012. "Credit Protection and Lending Relationships," Tinbergen Institute Discussion Papers 12-142/IV/DSF48, Tinbergen Institute.
  12. Marti G. Subrahmanyam & Dragon Yongjun Tang & Sarah Qian Wang, 2012. "Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk," Working Papers 292012, Hong Kong Institute for Monetary Research.

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