Control Rights and Capital Structure: An Empirical Investigation
Michael R. Roberts
The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)
University of Chicago - Booth School of Business; NBER
August 11, 2008
9th Annual Texas Finance Festival
AFA 2008 New Orleans Meetings
We show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy. Net debt issuing activity experiences a sharp and persistent decline following debt covenant violations, when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit. The effect of creditor actions on debt policy is strongest when the borrower's alternative sources of finance are costly. In addition, despite the less favorable terms offered by existing creditors, borrowers rarely switch lenders following a violation.
Number of Pages in PDF File: 68
Keywords: Capital Structure, Financial Policy, Debt, Control Rights, Optimal Contracting
JEL Classification: G32, G21, G31
Date posted: February 12, 2007 ; Last revised: December 13, 2011
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