Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies

52 Pages Posted: 27 Dec 2013 Last revised: 16 Jul 2018

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Rui Wang (Erik)

Lingnan University

Hong Zou

The University of Hong Kong - Faculty of Business and Economics

Date Written: June 17, 2017

Abstract

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

Chava, Sudheer and Wang, Rui and Zou, Hong, Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies (June 17, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2372296 or http://dx.doi.org/10.2139/ssrn.2372296

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/

Rui Wang

Lingnan University

8 Castle Peak Road
Tuen Mun, New Territories
Hong Kong

Hong Zou

The University of Hong Kong - Faculty of Business and Economics ( email )

Hong Kong

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