Creditor Control Rights and Resource Allocation Within Firms
72 Pages Posted: 14 Nov 2015 Last revised: 4 Nov 2019
Date Written: November 1, 2019
We examine the within-firm resource allocation and restructuring outcomes at firms violating debt covenants. Using establishment-level data from the U.S. Census Bureau, we find that covenant violations are followed by reductions in employment, investment, and more frequent establishment closures among violating firms’ noncore business lines and less productive establishments. These changes are concentrated among establishments at which manager-shareholder agency costs are pronounced and when key lenders have industry experience. Our findings suggest that enhanced creditor control reduces managerial agency costs and encourages a more efficient allocation of resources within the boundaries of firms in technical default.
Keywords: Control Rights; Restructuring; Corporate Governance; Creditors; Covenant Violations
JEL Classification: G21; G31; G32; G34
Suggested Citation: Suggested Citation