Spillovers From Creditor Control

Abstract

I test for causal spillover effects of creditor control following loan covenant violation using a hierarchical matching estimator that is new to the finance literature. Other estimation approaches (e.g. regression discontinuity) explicitly assume away spillover effects, and produce biased estimates when spillovers are present. I find that firms increase debt issuance and investment in response to rival firm covenant violation, and that these firms experience an increase in sales growth. Because causal identification is limited to non-violating rival firms who were just as likely to violate a covenant, this effect is novel from the "deep-pocket'" mechanism in the earlier literature.

Keywords: SUTVA, hierarchical matching, loan covenants, spillover effects

JEL Classification: G31, G32, G21