Operating Risk and the Scope of Lender Control Rights

50 Pages Posted: 25 Jan 2017 Last revised: 30 Jan 2017

Stephen A. Karolyi

Carnegie Mellon University - Tepper School of Business

John Sedunov III

Villanova University - Department of Finance

Date Written: November 1, 2016

Abstract

When lenders gain control rights in technical default, they influence corporate operating decisions. We develop a novel measure of operational risk-taking that utilizes industry-specific data on corporate operations. Using a regression discontinuity design, we find that borrowers reduce operational risk-taking following covenant violations, corresponding to a marginal decrease in the probability of experiencing distress within one year by as much as 10%. The magnitude of this effect is concentrated in borrowers with ex ante information asymmetry or agency problems and lending syndicates with low coordination costs, low expected loss given default, and high propensity for active intervention.

Keywords: operating risk, technical default, control rights, governance, syndicated loans

JEL Classification: G14, G32, G33, M41

Suggested Citation

Karolyi, Stephen A. and Sedunov, John, Operating Risk and the Scope of Lender Control Rights (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2799915 or http://dx.doi.org/10.2139/ssrn.2799915

Stephen A. Karolyi (Contact Author)

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
4122682909 (Phone)

John Sedunov III

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

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