Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies
52 Pages Posted: 27 Dec 2013 Last revised: 16 Jul 2018
Date Written: June 17, 2017
We analyze how creditors' simultaneous debt and equity holdings affect firm investment policies. Firms with dual ownership are less likely to have capital expenditure restrictions in loan contracts and the relation varies in predicted ways with borrowers' monitoring needs and dual owners' monitoring capacity. Less frequent use of capital expenditure restrictions, however, does not result in borrowers' risk-shifting. Dual ownership firms are also more likely to be granted an unconditional waiver and do not significantly reduce debt issuance or investment expenditures after a financial covenant violation. Our results highlight how dual ownership can help mitigate shareholder-creditor conflicts.
Keywords: Dual ownership; Loan covenant; Capital expenditure; Waiver; Difference-in-differences; Regression discontinuity
JEL Classification: G21, G31, G32
Suggested Citation: Suggested Citation