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Creditor Control Rights and Firm Investment Policy

Greg Nini
University of Pennsylvania - The Wharton School

David C. Smith
University of Virginia - McIntire School of Commerce

Amir Sufi
University of Chicago - Booth School of Business; NBER


April 2008


Abstract:     
We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at least as sensitive to borrower credit quality as other contractual terms, such as interest rates, collateral requirements, or the use of financial covenants. We find that capital expenditure restrictions cause a reduction in firm investment and that firms obtaining contracts with a new restriction experience subsequent increases in their market value and operating performance.

Keywords: Control Rights, Investment Policy, Financial Contracting, Financial Covenants, Capital Expenditures, Creditor Control

JEL Classifications: D23, G31, G32

Working Paper Series

Date posted: September 08, 2006 ; Last revised: May 25, 2008

Suggested Citation

Nini, Greg, Sufi, Amir and Smith, David C., Creditor Control Rights and Firm Investment Policy (April 2008). Available at SSRN: http://ssrn.com/abstract=928688


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Contact Information

David Carl Smith (Contact Author)
University of Virginia - McIntire School of Commerce ( email )
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
Gregory Nini
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
Amir Sufi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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