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Creditor Control Rights, Corporate Governance, and Firm Value

79 Pages Posted: 17 Aug 2009 Last revised: 14 Dec 2011

Greg Nini

Drexel University - Department of Finance

Amir Sufi

University of Chicago - Booth School of Business; NBER

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: December 11, 2011

Abstract

We provide evidence that creditors play an active role in the governance of corporations well outside of payment default states. By examining the SEC filings of all U.S. nonfinancial firms from 1996 through 2008, we document that, in any given year, between 10 percent and 20 percent of firms report being in violation of a financial covenant in a credit agreement. We show that violations are followed immediately with a decline in acquisitions and capital expenditures, a sharp reduction in leverage and shareholder payouts, and an increase in CEO turnover. The changes in the investment and financing behavior of violating firms coincide with amended credit agreements that contain stronger restrictions on firm decision-making; changes in the management of violating firms suggest that creditors also exert informal influence on corporate governance. Finally, we show that firm operating and stock price performance improve following a violation. We conclude that actions taken by creditors increase the value of the
average violating firm.

Keywords: covenants, covenant violations, corporate governance, creditors, control rights, CEO turnover, acquisition

JEL Classification: G34, G30, G31, G32, G33

Suggested Citation

Nini, Greg and Sufi, Amir and Smith, David C., Creditor Control Rights, Corporate Governance, and Firm Value (December 11, 2011). Available at SSRN: https://ssrn.com/abstract=1344302 or http://dx.doi.org/10.2139/ssrn.1344302

Gregory Nini

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Amir Sufi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Carl Smith (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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