Creditor Interventions and Firm Innovation: Evidence from Debt Covenant Violations
Pennsylvania State University, SGPS
Connie X. Mao
Temple University - Fox School of Business and Management
Indiana University - Kelley School of Business
We examine the effect of creditor interventions on firm innovation via the lens of debt covenant violations, where control rights are shifted from equity holders to creditors. Our baseline results show that creditor interventions triggered by covenant violations are negatively related to both innovation quantity and quality. To establish causality, we use a difference-in-differences approach and a regression discontinuity design. Our identification tests suggest a negative, causal effect of creditor interventions on innovation. We further find that the negative effect of creditor interventions on innovation is exacerbated by strong creditor controls and is mitigated by creditors’ expertise in the innovative firms’ industries. Finally, the turnover of innovative inventors appears a possible underlying mechanism through which creditors adversely affect firm innovation. Our paper offers novel evidence on an unidentified real effect of creditor interventions – their hindrance to firm innovation.
Number of Pages in PDF File: 48
Keywords: Creditor interventions, innovation, covenant violations, patents, citations
JEL Classification: G21, G32, G34, O31working papers series
Date posted: September 22, 2013 ; Last revised: October 14, 2013
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