Creditor Control Rights and Resource Allocation within Firms

Creditor Control Rights and Resource Allocation within Firms

Nuri Ersahin, Rustom Irani, Hanh Le

Series number :

Serial Number: 
484/2016

Date posted :

July 05 2016

Last revised :

April 06 2017
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Keywords

  • Covenant violations • 
  • Corporate governance • 
  • control rights • 
  • creditors

We examine the within-firm resource allocation and restructuring effects of creditor intervention and their relationship to performance gains at firms violating covenants in private credit agreements. By linking firms to establishment-level data from the U.S.

Census Bureau, we demonstrate that covenant violations are followed by large reductions in employment and more frequent establishment sales and closures. These cuts are concentrated in violating firms? noncore business lines and underperforming establishments. We conclude that refocusing operations and improving productive efficiency are important channels through which creditors enhance violating firms? performance.

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Authors

Real name:
Nuri Ersahin
Real name:
Rustom Irani
College of Business, University of Illinois
Real name:
Hanh Le