Creditor Intervention, Investment and Growth Opportunities
41 Pages Posted: 2 Oct 2010 Last revised: 4 Dec 2015
Date Written: August 26, 2014
We show that creditors do not just ensure that inefficient investment is not undertaken, but also do not preclude efficient investment. Examining what happens following a debt covenant violation, a situation through which creditors acquire some control rights over the firm, we find that investment declines when the firm has few growth opportunities but it may increase otherwise. The results are robust to the use of different proxies for growth opportunities. The firm’s performance improves but it suffers dividend cuts and increased CEO turnover. The results suggest that creditors consider the benefits of growth opportunities as a source of future cash flows to meet outstanding debt obligations.
Keywords: Creditor control rights, Growth opportunities, Investment, Performance
JEL Classification: G21, G32
Suggested Citation: Suggested Citation