Abstract

http://ssrn.com/abstract=2329007
 


 



Creditor Interventions and Firm Innovation: Evidence from Debt Covenant Violations


Yuqi Gu


Pennsylvania State University, SGPS

Connie X. Mao


Temple University - Fox School of Business and Management; Temple University - Department of Finance

Xuan Tian


Indiana University - Kelley School of Business - Department of Finance

May 1, 2014


Abstract:     
We examine the effect of creditor interventions on corporate innovation and firm value via the lens of debt covenant violations, where control rights are shifted from equity holders to creditors. Using a difference-in-differences approach and a regression discontinuity design, we find that creditor interventions have a negative, causal effect on innovation output. We further show that the reduction in innovation output is concentrated in innovation activities that are unrelated to the violating firm’s core business, which leads to a more focused scope of innovation investment and ultimately an increase in firm value. Human capital redeployment appears a plausible underlying mechanism through which creditor interventions refocus firm innovation scope and enhance firm value. Our findings are consistent with the argument that creditors help mitigate investment distortions in innovation arising from conflicts of interest between managers and shareholders. Our paper sheds new light on the real effect of creditor interventions.

Number of Pages in PDF File: 56

Keywords: Creditor interventions, innovation, covenant violations, conflicts of interest, firm value

JEL Classification: G21, G32, G34, O31

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Date posted: September 22, 2013 ; Last revised: May 21, 2014

Suggested Citation

Gu, Yuqi and Mao, Connie X. and Tian, Xuan, Creditor Interventions and Firm Innovation: Evidence from Debt Covenant Violations (May 1, 2014). Available at SSRN: http://ssrn.com/abstract=2329007 or http://dx.doi.org/10.2139/ssrn.2329007

Contact Information

Yuqi Gu (Contact Author)
Pennsylvania State University, SGPS ( email )
30 E. Swedesford Road
Malvern, PA 19355
United States
610-725-5391 (Phone)
610-725-5224 (Fax)
Connie X. Mao
Temple University - Fox School of Business and Management ( email )
416 Alter Hall
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Temple University - Department of Finance ( email )
Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Xuan Tian
Indiana University - Kelley School of Business - Department of Finance ( email )
1309 E. Tenth Street
Bloomington, IN 47405
United States
812-8553420 (Phone)
824-8555875 (Fax)
HOME PAGE: http://kelley.iu.edu/tianx

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