Operating Risk and the Scope of Lender Control Rights

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

See all articles by Stephen A. Karolyi

Stephen A. Karolyi

Office of the Comptroller of the Currency

John Sedunov

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)

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

John Sedunov

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/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
157
Abstract Views
1,285
rank
271,830
PlumX Metrics