Holding Equity and Debt of the Same Firms Can Prove Suboptimal

Journal of Applied Finance, Spring/Summer 2009, Vol. 19, Issue 1/2, pp. 19-27

Posted: 29 Jul 2012

See all articles by Serge Wibaut

Serge Wibaut

Catholic University of Louvain (UCL) - Department of Finance

Sykes Wilford

The Citadel

Multiple version iconThere are 2 versions of this paper

Date Written: 2009

Abstract

Most financial institutions, such as insurance companies or pension funds, hold diversified asset portfolios. Very often these institutions try to follow or to outperform a market index for each asset class in which they invest, e.g. bonds and equities. Often the same issuers appear in each of those indices. Very little attention has been paid until now to the concentration this represents and the potential unintended consequences of targeting said indices simultaneously. This paper addresses this issue and suggests that holding the bonds and the equity of the same company may lead to undesirable results, as experienced during the financial crisis of 2008 and 2009.

Keywords: Financial Institutions, Pension Trusts, Insurance Companies, Investments Institutional Investors, Global Financial Crisis 2008-2009

Suggested Citation

Wibaut, Serge and Wilford, Sykes, Holding Equity and Debt of the Same Firms Can Prove Suboptimal (2009). Journal of Applied Finance, Spring/Summer 2009, Vol. 19, Issue 1/2, pp. 19-27, Available at SSRN: https://ssrn.com/abstract=1652575

Serge Wibaut (Contact Author)

Catholic University of Louvain (UCL) - Department of Finance ( email )

1 place des Doyens
B-1348 Louvain-la-Neuve
Belgium

Sykes Wilford

The Citadel ( email )

171 Moultrie St.
Charleston, SC 29409
United States

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