(How) Does Mutual Fund Dual Ownership Affect Shareholder and Creditor Conflict of Interest? Evidence from Corporate Innovation

Abstract

We examine the impact of mutual fund dual ownership (i.e., simultaneous holdings of stocks and bonds of the same company by mutual fund families) on corporate innovation. Our findings indicate that dual ownership is positively associated with innovation quantity, quality, generality, and originality. This effect is mainly driven by non-index funds, which are more likely to be active monitors. Consequently, both stocks and bonds held by dual owners tend to generate higher returns, particularly for more significant, groundbreaking innovations. These results suggest that mutual fund dual ownership mitigates conflicts of interest between shareholders and creditors, thereby enhancing innovation and firm value. However, the relation between dual ownership and innovation turns negative during the recent financial crisis, suggesting that shareholder-creditor conflicts culminate in extreme financial distress, exacerbating dual holders’ risk aversion, and hence, hindering corporate innovation.