Creditor Control of Corporate Acquisitions

64 Pages Posted: 3 Oct 2017 Last revised: 26 Jan 2020

See all articles by David Becher

David Becher

Drexel University

Thomas P. Griffin

Villanova University - Department of Finance & Real Estate

Greg Nini

Drexel University - Department of Finance

Date Written: January 23, 2020

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, and do not pursue less risky deals. We conclude that creditors use contractual rights and the loan renegotiation process to limit value-destroying acquisitions driven by managerial agency problems.

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 (January 23, 2020). 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

Villanova University - Department of Finance & Real Estate ( email )

United States

HOME PAGE: http://www.thomaspgriffin.com

Gregory Nini (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

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