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


  • Henry T. C. Hu
  • Bernard Black


"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.

Suggested Citation

  • Henry T. C. Hu & Bernard Black, 2008. "Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications," European Financial Management, European Financial Management Association, vol. 14(4), pages 663-709.
  • Handle: RePEc:bla:eufman:v:14:y:2008:i:4:p:663-709

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    References listed on IDEAS

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    Cited by:

    1. Arping, Stefan, 2014. "Credit protection and lending relationships," Journal of Financial Stability, Elsevier, vol. 10(C), pages 7-19.
    2. Campello, Murillo & Matta, Rafael, 2012. "Credit default swaps and risk-shifting," Economics Letters, Elsevier, vol. 117(3), pages 639-641.
    3. : Gi H. Kim, 2013. "Credit Default Swaps, Strategic Default, and the Cost of Corporate Debt," Working Papers wpn13-12, Warwick Business School, Finance Group.
    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;Western Finance Association, vol. 42(1), pages 85-107, October.
    5. 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.
    6. 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.
    7. Shahzad, Syed Jawad Hussain & Nor, Safwan Mohd & Mensi, Walid & Kumar, Ronald Ravinesh, 2017. "Examining the efficiency and interdependence of US credit and stock markets through MF-DFA and MF-DXA approaches," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 351-363.
    8. Marc Chesney & Delia Coculescu & Selim Gökay, 2016. "Endogenous trading in credit default swaps," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(1), pages 1-31, April.
    9. Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit default swaps and corporate cash holdings," CFS Working Paper Series 462, Center for Financial Studies (CFS).
    10. Stefano Colonnello & Matthias Efing & Francesca Zucchi, 2016. "Empty Creditors and Strong Shareholders: The Real Effects of Credit Risk Trading," Swiss Finance Institute Research Paper Series 16-17, Swiss Finance Institute, revised Jun 2016.
    11. Feldhütter, Peter & Hotchkiss, Edith & Karakaş, Oğuzhan, 2016. "The value of creditor control in corporate bonds," Journal of Financial Economics, Elsevier, vol. 121(1), pages 1-27.
    12. 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.
    13. McDonald, Robert L., 2013. "Contingent capital with a dual price trigger," Journal of Financial Stability, Elsevier, vol. 9(2), pages 230-241.
    14. Jongsub Lee & Junho Oh & David Yermack, 2017. "Credit Default Swaps, Agency Problems, and Management Incentives," NBER Working Papers 24064, National Bureau of Economic Research, Inc.
    15. Kim, Gi H., 2016. "Credit derivatives as a commitment device: Evidence from the cost of corporate debt," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 67-83.
    16. Calice, Giovanni & Ioannidis, Christos, 2012. "An empirical analysis of the impact of the credit default swap index market on large complex financial institutions," International Review of Financial Analysis, Elsevier, vol. 25(C), pages 117-130.
    17. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    18. Bolton, Patrick & Oehmke, Martin, 2013. "Strategic conduct in credit derivative markets," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 652-658.
    19. Colonnello, Stefano, 2017. "Internal governance and creditor governance: Evidence from credit default swaps," IWH Discussion Papers 6/2017, Halle Institute for Economic Research (IWH).
    20. 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.

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