Asset Allocation, Diversification, and Co-Movement Effects: A Global Analysis of Bonds and Equities Issued by the Same Firm

This study investigates the asset return co-movement with the same issuer and examines the relationship between the correlation and agency conflicts. This study constructs a large unique panel dataset that consists of 2,089 firms from 2001 to 2019 across 50 countries. This research reveals a compelling positive correlation between the monthly returns of bonds and equities. Moreover, lower conflict of interest among stakeholders corresponds to a higher degree of co-movement between these financial instruments. This insightful discovery underscores the pivotal role of corporate governance and regulatory safeguards in harmonizing the interests of debtholders and equity holders. Notably, these results maintain their robustness when employing the rigorous two-stage least squares instrumental variable approach and conducting supplementary sub-sample tests. This study stands as a pioneering investigation into bond–equity co-movement from the same issuer, shedding light on its intricate connections to agency conflicts and regulatory influences.