Creditor Control of Corporate Acquisitions

58 Pages Posted: 3 Oct 2017 Last revised: 22 Nov 2018

See all articles by David Becher

David Becher

Drexel University

Thomas P. Griffin

Drexel University - Bennett S. LeBow College of Business

Greg Nini

Drexel University - Department of Finance

Date Written: November 20, 2018

Abstract

We examine the impact of creditor control rights on corporate acquisitions. Nearly 75% of private credit agreements restrict borrower acquisition decisions. Following a covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn negative announcement returns. Firms that do announce an acquisition while in violation of a covenant earn 1.8% higher stock returns, on average, with the effect concentrated among firms with weak external governance. We conclude that creditors provide valuable corporate governance that benefits shareholders by reducing managerial agency costs.

Keywords: acquisitions, control rights, corporate governance, covenant violations, creditors

JEL Classification: G21, G31, G32, G34

Suggested Citation

Becher, David and Griffin, Thomas and Nini, Gregory, Creditor Control of Corporate Acquisitions (November 20, 2018). Available at SSRN: https://ssrn.com/abstract=3046910 or http://dx.doi.org/10.2139/ssrn.3046910

David Becher

Drexel University ( email )

3220 Market Street
1127 Gerri C LeBow Hall
Philadelphia, PA 19104
United States
215-895-2274 (Phone)
215-895-2295 (Fax)

Thomas Griffin

Drexel University - Bennett S. LeBow College of Business ( email )

Philadelphia, PA
United States

Gregory Nini (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

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