56 Pages Posted: 17 Oct 2016 Last revised: 26 Feb 2017
Date Written: February 24, 2017
We examine the within-firm resource allocation and restructuring effects of creditor discipline and its relation to performance gains at firms violating debt covenants. We use establishment-level data from the U.S. Census Bureau to demonstrate that covenant violations are followed by large reductions in employment, investment, and more frequent establishment closures among violating firms’ noncore business lines and underperforming establishments. We conclude that refocusing operations and improving productive efficiency via capital reallocation are important channels through which creditors facilitate the turnaround of firms in technical default.
Keywords: Corporate Governance; Covenants; Covenant Violations; Creditors; Control Rights; Restructuring; Capital Reallocation; Productivity
JEL Classification: G21; G31; G32; G34
Suggested Citation: Suggested Citation
Ersahin, Nuri and Irani, Rustom M. and Le, Hanh, Creditor Control Rights and Resource Allocation within Firms (February 24, 2017). ECGI - Finance Working Paper No. 484/2016. Available at SSRN: https://ssrn.com/abstract=2847142