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Growth Opportunities, Leverage and Financial Contracting: Evidence from Exogenous Shocks to Public Spending

50 Pages Posted: 23 Jun 2016 Last revised: 19 Nov 2016

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Mahfuz Chy

University of Toronto, Rotman School of Management, Students

Date Written: September 16, 2016

Abstract

This study examines how exogenous negative shocks to firms’ growth opportunities affect debt structure and financial contracting policy. Specifically, we exploit staggered shocks to firm-level growth opportunities arising out of exogenous increases in state-level government spending subsequent to the ascension of politicians to chairmanships or ranking minority leaderships of powerful Senate/House committees. In contrast to prior studies, we fail to find statistically significant impact of growth opportunities on firm leverage. We also fail to find support for the conjecture that bondholder-shareholder conflicts are mitigated by shorter-term debt, convertible debt or public debt covenants. However, we do find that negative shocks to growth opportunities lead to a reduction in debt covenants for private loans consistent with the notion that bondholder-shareholder conflicts are managed through financial contracting policies.

Suggested Citation

Callen, Jeffrey L. and Chy, Mahfuz, Growth Opportunities, Leverage and Financial Contracting: Evidence from Exogenous Shocks to Public Spending (September 16, 2016). Rotman School of Management Working Paper No. 2799054; 27th Annual Conference on Financial Economics and Accounting Paper. Available at SSRN: https://ssrn.com/abstract=2799054 or http://dx.doi.org/10.2139/ssrn.2799054

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Mahfuz R Chy

University of Toronto, Rotman School of Management, Students ( email )

Toronto, ON
Canada

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