This research examines an unintended consequence of the global trend to increase shareholder power through tools such as say-on-pay and proxy access. Specifically, it examines whether giving shareholders greater power leads to fewer creditors willing to finance the firm.
The study uses a difference-in-differences (DID) approach, exploiting the introduction of mandatory say-on-pay (SoP) laws across 32 countries as a quasi-natural experiment. It analyzes a panel dataset of around 38,000 firm-year observations from 2000 to 2020. DID approach addresses potential biases from treatment timing using the Callaway and Sant'Anna (2021) estimator, checks for parallel trends over an extended five-year pre-treatment period.
The results show that increasing shareholder power through say-on-pay laws reduces the number of creditors of affected firms by about 8.5%. This reduction translates to approximately 0.7 fewer lenders and an estimated $12.4 million in lost debt capacity for the average firm. The impact primarily affects unsecured creditors (12.3% decrease), non-relationship lenders (14.1% decrease), and institutional lenders (11.1% decrease), as these groups are most at risk of losing wealth due to shareholder actions.
Governance reforms that empower shareholders result in high unintended costs. This raises perceived agency risks for creditors, which leads to less debt financing and a more concentrated, fragile capital structure. These findings create an important trade-off for policymakers and firms. Improving shareholder democracy must be balanced against the risk of losing debt providers. Strong creditor protections provide a path for coexistence, suggesting that effective governance frameworks must consider the interests of both types of capital providers.
This research provides new evidence that empowering shareholders alters not only the price and terms of debt but also the fundamental structure of corporate lending. By highlighting the broad range of creditor reactions – choosing to exit rather than reprice – and identifying the behavioral factors behind this effect, the study reveals an important yet previously overlooked trade-off in corporate governance.
