Shareholder Bargaining Power, Debt Overhang, and Investment

73 Pages Posted: 7 May 2012 Last revised: 27 Jun 2016

See all articles by Emmanuel Alanis

Emmanuel Alanis

Texas State University

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Praveen Kumar

University of Houston - Department of Finance

Date Written: June 1, 2016

Abstract

Using a dynamic model of strategic bargaining between equity and debt holders following default, we analyze the impact of shareholder bargaining power on the investment effects of debt overhang. Our empirical tests utilize a new measure of debt overhang wedge based on default probabilities generated from a hazard model for bankruptcy. Consistent with the theoretical predictions, bondholder (shareholder) ownership concentration ceteris paribus enhances (weakens) the overhang wedge and dampens (increases) capital investment. We identify novel ownership structure related factors in firm-level capital investment and document how post-default shareholder bargaining power alleviates the underinvestment problem caused by debt overhang.

Keywords: Debt Overhang, Shareholder Bargaining Power, APR Violations

JEL Classification: G30, G31, G32, G33

Suggested Citation

Alanis, Emmanuel and Chava, Sudheer and Kumar, Praveen, Shareholder Bargaining Power, Debt Overhang, and Investment (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2053511 or http://dx.doi.org/10.2139/ssrn.2053511

Emmanuel Alanis

Texas State University ( email )

San Marcos, TX 78666
United States

Sudheer Chava (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Praveen Kumar

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States
713-743-4770 (Phone)
713-743-4789 (Fax)

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