Control Rights and Capital Structure: An Empirical Investigation
68 Pages Posted: 12 Feb 2007 Last revised: 13 Dec 2011
Date Written: August 11, 2008
We show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy. Net debt issuing activity experiences a sharp and persistent decline following debt covenant violations, when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit. The effect of creditor actions on debt policy is strongest when the borrower's alternative sources of finance are costly. In addition, despite the less favorable terms offered by existing creditors, borrowers rarely switch lenders following a violation.
Keywords: Capital Structure, Financial Policy, Debt, Control Rights, Optimal Contracting
JEL Classification: G32, G21, G31
Suggested Citation: Suggested Citation