Blocking Block-Formation: Evidence from Private Loan Contracts

76 Pages Posted: 10 Jun 2019 Last revised: 13 Dec 2022

See all articles by Brian Akins

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

David De Angelis

University of Houston - C.T. Bauer College of Business

Rustam Zufarov

University of Illinois at Chicago

Date Written: December 10, 2022

Abstract

Capital covenants in credit agreements mitigate agency problems by aligning creditor-shareholder interests. By investigating change in control (CIC) clauses, this paper shows that the way equity capital is distributed and potential conflicts of interest among shareholders also matter to lenders. Examining 14,940 private loan contracts, we document significant heterogeneity in CIC clauses. Specifically, CICs include equity ownership caps, which limit large equity block formation, with high variation in cap thresholds. Lenders set lower caps to mitigate risks arising from activism, takeovers, within-syndicate coordination costs, and power contests among shareholders. Caps below 50% are associated with a drop in firm value but not in the cost of debt, indicating exacerbated firm-manager agency costs. Finally, these caps are associated with changes in buyback policies and largest block size, suggesting new ways creditors may influence corporate governance.

Keywords: Equity Block Formation, Change in Control, Debt Contracting

JEL Classification: G20, G32, G34

Suggested Citation

Akins, Brian K. and De Angelis, David and Zufarov, Rustam, Blocking Block-Formation: Evidence from Private Loan Contracts (December 10, 2022). Available at SSRN: https://ssrn.com/abstract=3393628 or http://dx.doi.org/10.2139/ssrn.3393628

Brian K. Akins

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

David De Angelis (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Rustam Zufarov

University of Illinois at Chicago ( email )

1200 W Harrison St
Chicago, IL 60607
United States

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