Does Expanding Fiduciary Duties towards Debtholders Shift Focus to Long-Term Shareholder Value Creation?

The 1991 Delaware court ruling involving Credit Lyonnais expanded the fiduciary duties of managers towards debtholders in the event that a firm is within the proximity of insolvency. Using a difference-in-differences approach that exploits this exogenous shock, we find that the 1991 ruling induced managers of Delaware firms ex ante to place a greater emphasis on investments that foster long-term innovation, and a reduced focus on achieving myopic earnings goals. Further, we find a shift away from transient to dedicated institutional ownership after the court ruling, along with significant declines in cost of equity and increases in Tobin s Q. Overall, our results indicate that the exogenous shock to the agency environment, ostensibly in favor of debtholders, influenced real decisions and firm focus. In the process, it also altered the composition of the shareholder base and was ultimately beneficial for shareholders. * Corresponding author This paper has benefited from comments by, and discussions with, Mark Bradshaw and Amy Hutton.