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How Does Financing Impact Investment? The Role of Debt CovenantsSudheer ChavaGeorgia Institute of Technology - College of Management Michael R. RobertsThe Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) August 2, 2007 AFA 2007 Chicago Meetings Paper Abstract: We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations where agency and information problems are relatively more severe, highlighting how the state contingent allocation of control rights can help mitigate investment distortions arising from financing frictions.
Number of Pages in PDF File: 61 Keywords: Investment, Covenant, Debt, Contracts, Renegotiation, Default, Control Rights JEL Classification: G31, G33, G21, G32 working papers seriesDate posted: November 26, 2005Suggested CitationContact Information
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