Creditor Control Rights and Resource Allocation within Firms

56 Pages Posted: 17 Oct 2016 Last revised: 26 Feb 2017

Nuri Ersahin

University of Illinois at Urbana-Champaign - Department of Finance

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance

Hanh Le

University of Illinois at Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: February 24, 2017

Abstract

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

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

Nuri Ersahin

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

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://sites.google.com/site/nuriersahin/

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://business.illinois.edu/rirani/

Hanh Le

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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