Creditor Control Rights and Firm Investment Policy

48 Pages Posted: 8 Sep 2006 Last revised: 14 Sep 2014

Greg Nini

Drexel University - Department of Finance

Amir Sufi

University of Chicago - Booth School of Business; NBER

David C. Smith

University of Virginia - McIntire School of Commerce

Date Written: April 2008

Abstract

We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at least as sensitive to borrower credit quality as other contractual terms, such as interest rates, collateral requirements, or the use of financial covenants. We find that capital expenditure restrictions cause a reduction in firm investment and that firms obtaining contracts with a new restriction experience subsequent increases in their market value and operating performance.

Keywords: Control Rights, Investment Policy, Financial Contracting, Financial Covenants, Capital Expenditures, Creditor Control

JEL Classification: D23, G31, G32

Suggested Citation

Nini, Greg and Sufi, Amir and Smith, David C., Creditor Control Rights and Firm Investment Policy (April 2008). Available at SSRN: https://ssrn.com/abstract=928688 or http://dx.doi.org/10.2139/ssrn.928688

Gregory Nini

Drexel University - Department of Finance ( email )

LeBow College of Business
Philadelphia, PA 19104
United States

Amir Sufi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David Carl Smith (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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