Abstract

http://ssrn.com/abstract=854324
 
 

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How Does Financing Impact Investment? The Role of Debt Covenants


Sudheer Chava


Georgia Institute of Technology - College of Management

Michael R. Roberts


The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

August 2, 2007

AFA 2007 Chicago Meetings Paper

Abstract:     
We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations where agency and information problems are relatively more severe, highlighting how the state contingent allocation of control rights can help mitigate investment distortions arising from financing frictions.

Number of Pages in PDF File: 61

Keywords: Investment, Covenant, Debt, Contracts, Renegotiation, Default, Control Rights

JEL Classification: G31, G33, G21, G32

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Date posted: November 26, 2005  

Suggested Citation

Chava, Sudheer and Roberts, Michael R., How Does Financing Impact Investment? The Role of Debt Covenants (August 2, 2007). AFA 2007 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=854324 or http://dx.doi.org/10.2139/ssrn.854324

Contact Information

Sudheer Chava
Georgia Institute of Technology - College of Management ( email )
800 West Peachtree St., NW
Atlanta, GA 30308-1149
United States
HOME PAGE: http://www.prism.gatech.edu/~schava6/
Michael R. Roberts (Contact Author)
The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )
3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)
HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/
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