Creditor control rights and resource allocation within firms |
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| Authors: | Nuri Ersahin Rustom M Irani Hanh Le |
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| Institution: | 1. Broad College of Business, Michigan State University, 308 Eppley Center, East Lansing, MI 48824, USA;2. Gies College of Business, University of Illinois at Urbana-Champaign, 1206 South Sixth Street, Champaign, IL 61820, USA;3. College of Business, University of Illinois at Chicago, 601 South Morgan Street, Chicago, IL 60607, USA;1. Oslo Metropolitan University, Oslo Business School, Pilestredet 46, Oslo 0130, Norway;2. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;3. Department of Banking and Finance, Monash University, 900 Dandenong Rd., Caulfield East VIC 3145, Australia;1. Harvard Business School, United States;2. Princeton University, United States;1. Department of Finance, Southern University of Science and Technology, 1088 Xueyuan Blvd., Shenzhen, Guangdong 518055, China;2. Department of Finance and Economics, Rutgers Business School, Rutgers University, 100 Rockafeller Road, Piscataway, NJ 08854, United States;3. Department of Finance, DePaul University, 1 E. Jackson Blvd., Suite 5500, Chicago, IL 60604, United States;1. Federal Reserve Board, 20th and C St. NW, Washington, DC 20551, United States;2. Indiana University, Bloomington, United States;3. Stockholm School of Economics, Sveavagen 65, Box 6506, S-113 83 Stockholm, Sweden;4. Center for Economic Policy Research, London, United Kingdom;5. European Corporate Governance Institute, Brussels Belgium |
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| 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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