Abstract

http://ssrn.com/abstract=1344302
 
 

References (129)



 
 

Citations (46)



 


 



Creditor Control Rights, Corporate Governance, and Firm Value


Greg Nini


University of Pennsylvania - Finance Department

Amir Sufi


University of Chicago - Booth School of Business; NBER

David C. Smith


University of Virginia - McIntire School of Commerce

December 11, 2011


Abstract:     
We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in leverage and shareholder payouts, and an increase in CEO turnover. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making; changes in the management of violating firms suggest that creditors also exert informal influence on corporate governance. Finally, we show that firm operating and stock price performance improve following a violation. We conclude that actions taken by creditors increase the value of the
average violating firm.

Number of Pages in PDF File: 79

Keywords: covenants, covenant violations, corporate governance, creditors, control rights, CEO turnover, acquisition

JEL Classification: G34, G30, G31, G32, G33

working papers series


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Date posted: August 17, 2009 ; Last revised: December 14, 2011

Suggested Citation

Nini, Greg and Sufi, Amir and Smith, David C., Creditor Control Rights, Corporate Governance, and Firm Value (December 11, 2011). Available at SSRN: http://ssrn.com/abstract=1344302 or http://dx.doi.org/10.2139/ssrn.1344302

Contact Information

Gregory Nini
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Amir Sufi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
David Carl Smith (Contact Author)
University of Virginia (UVA) - McIntire School of Commerce ( email )
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
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