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Creditor control rights and resource allocation within firms

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  • Ersahin, Nuri
  • Irani, Rustom M.
  • Le, Hanh

Abstract

We examine the within-firm resource allocation and restructuring outcomes at firms violating debt covenants. Using establishment-level data from the US Census Bureau, we find that covenant violations are followed by reductions in employment, investment, and more frequent establishment closures among violating firms’ noncore business lines and less productive establishments. These changes are concentrated among establishments at which manager-shareholder agency costs are pronounced and when key lenders have industry experience. Our findings suggest that enhanced creditor control reduces managerial agency costs and encourages a more efficient allocation of resources within the boundaries of firms in technical default.

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  • Ersahin, Nuri & Irani, Rustom M. & Le, Hanh, 2021. "Creditor control rights and resource allocation within firms," Journal of Financial Economics, Elsevier, vol. 139(1), pages 186-208.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:1:p:186-208
    DOI: 10.1016/j.jfineco.2020.07.006
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    More about this item

    Keywords

    Control rights; Restructuring; Corporate governance; Creditors; Covenant violations;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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