Creditor Control Rights and Resource Allocation Within Firms

72 Pages Posted: 14 Nov 2015 Last revised: 4 Nov 2019

See all articles by Nuri Ersahin

Nuri Ersahin

Southern Methodist University (SMU) - Finance Department

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

Hanh Le

University of Illinois at Chicago

Date Written: November 1, 2019

Abstract

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

Ersahin, Nuri and Irani, Rustom M. and Le, Hanh, Creditor Control Rights and Resource Allocation Within Firms (November 1, 2019). ECGI - Finance Working Paper No. 484/2017, US Census Bureau Center for Economic Studies Paper No. CES-WP-15-39, Available at SSRN: https://ssrn.com/abstract=2689866 or http://dx.doi.org/10.2139/ssrn.2689866

Nuri Ersahin

Southern Methodist University (SMU) - Finance Department ( email )

United States

Rustom M. Irani (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://rirani.web.illinois.edu

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Hanh Le

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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