The Conflict of Interests between Stockholders and Debtholders: Exploring a Reverse Wealth Transfer at Sears

• In Event: Earnings Management

Abstract

This paper investigates the idea of a reverse wealth transfer from stockholders to debtholders through a mechanism of an influential creditor. The common view in the literature addresses a transfer of wealth from debtholders to stockholders by investing, for example, is risky projects which generate returns to stockholders at the expense of the debtholders - the overinvestment problem and assets substitution. However, not enough research has addressed the transfer of wealth in the opposite way - from stockholders to bondholders. This paper contributes to the literature by exploring and highlighting such a reverse wealth transfer. Using an illustrative example based on the real-world numbers at Sears Holding Corporation, and by examining the evidence and circumstances at Sears, the paper highlights and demonstrates the notion of a reverse wealth transfer from stockholders to debtholders through a mechanism of an influential creditor. In addition, the paper examines the range of the influential creditor’s share ownership in which the conflict of interests between the influential creditor and the rest of the stockholders exists. The findings of this paper suggest that stockholders should consider and establish a protection mechanism against an influential creditor.

Author

• Yoel Beniluz, William Patterson University