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

Xuan Tian


Indiana University - Kelley School of Business

October 2013


Abstract:     
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, O31

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Date posted: September 22, 2013 ; Last revised: October 14, 2013

Suggested Citation

Gu, Yuqi and Mao, Connie X. and Tian, Xuan, Creditor Interventions and Firm Innovation: Evidence from Debt Covenant Violations (October 2013). 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)
Xuan Tian
Indiana University - Kelley School of Business ( 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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