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; Temple University - Department of Finance
Indiana University - Kelley School of Business - Department of Finance
May 1, 2014
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, O31working papers series
Date posted: September 22, 2013 ; Last revised: May 21, 2014
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