Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-25T07:10:58.279Z Has data issue: false hasContentIssue false
  • English
  • Français

Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies

Published online by Cambridge University Press:  07 September 2018

Sudheer Chava ,
Rui Wang  and
Hong Zou
Get access Rights & Permissions [Opens in a new window]

Abstract

This article analyzes how creditors’ simultaneous debt and equity holdings affect firm investment policies. We find that firms with dual ownership are less likely to have capital expenditure restrictions in loan contracts, and the relation varies in predicted ways with the monitoring needs of borrowers and the monitoring capacity of dual owners. A less frequent use of capital expenditure restrictions, however, does not result in borrowers’ risk-shifting. Dual ownership firms are also more likely to be granted an unconditional waiver and do not significantly reduce debt issuance or investment expenditures after a financial covenant violation. Our results highlight how dual ownership can help mitigate shareholder–creditor conflicts.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 481 - 512
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

The authors are listed alphabetically. We thank Paul Malatesta (the editor) and an anonymous referee for insightful comments. This article also benefits from the comments of Tim Adam, Thorsten Beck, Murillo Campello, Chao Chen, Eitan Goldman, Wei Jiang, Madhu Kalimipalli, Kai Li, Tse-Chun Lin, Pedro Matos, Rik Sen, Tao Shu, David Smith, Dragon Tang, Cong Wang, Yihui Wang, Han Xia, and seminar participants at the Chinese University of Hong Kong, City University of Hong Kong, Clemson University, Fudan University, Hong Kong Baptist University, Hong Kong Polytechnic University, Indian Institute of Management Bangalore, Indian School of Business, and Wilfrid Laurier University, as well as participants at the 2015 China International Conference in Finance. We thank Amir Sufi for graciously sharing the loan covenant and violation data.

References

Altman, E.“Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.Google Scholar
Beneish, M., and Press, E.. “The Resolution of Technical Default.” Accounting Review, 70 (1995), 337–353.Google Scholar
Bharath, S., and Shumway, T.. “Forecasting Default with the Merton Distance to Default Model.” Review of Financial Studies, 21 (2008), 1339–1369.Google Scholar
Bradley, M., and Roberts, M.. “The Structure and Pricing of Corporate Debt Covenants.” Quarterly Journal of Finance, 5 (2015), 1550001-1–1550001-37.Google Scholar
Bushee, B.“Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?” Contemporary Accounting Research, 18 (2001), 207–246.Google Scholar
Cella, C.; Ellul, A.; and Giannetti, M.. “Investors’ Horizons and the Amplification of Market Shocks.” Review of Financial Studies, 26 (2013), 1607–1648.Google Scholar
Chalmers, J. M. R.; Dann, L. Y.; and Harford, J.. “Managerial Opportunism? Evidence from Directors’ and Officers’ Insurance Purchases.” Journal of Finance, 57 (2002), 609–636.Google Scholar
Chava, S.; Fang, S.; and Prabhat, S.. “Dynamic Thresholds in Financial Covenants.” Working Paper, Georgia Institute of Technology (2016).Google Scholar
Chava, S.; Kumar, P.; and Warga, A.. “Managerial Agency and Bond Covenants.” Review of Financial Studies, 23 (2010), 1120–1148.Google Scholar
Chava, S.; Livdan, D.; and Purnanandam, A.. “Do Shareholder Rights Affect the Cost of Bank Loans?” Review of Financial Studies, 22 (2009), 2973–3004.Google Scholar
Chava, S., and Roberts, M.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.Google Scholar
Chen, K., and Wei, K.. “Creditors’ Decisions to Waive Violations of Accounting-Based Debt Covenants.” Accounting Review, 68 (1993), 218–232.Google Scholar
Choi, N., and Sias, R.. “Institutional Industry Herding.” Journal of Financial Economics, 94 (2009), 469–491.Google Scholar
Denis, D., and Wang, J.. “Debt Covenant Renegotiations and Creditor Control Rights.” Journal of Financial Economics, 113 (2014), 348–367.Google Scholar
Ferreira, M., and Matos, P.. “Universal Banks and Corporate Control: Evidence from the Global Syndicated Loan Market.” Review of Financial Studies, 25 (2012), 2703–2744.Google Scholar
Freudenberg, F.; Imbierowicz, B.; Saunders, A.; and Steffen, S.. “Covenant Violations, Loan Contracting, and Default Risk of Bank Borrowers.” Working Paper, Goethe University Frankfurt (2012).Google Scholar
Gormley, T., and Matsa, D.. “Growing Out of Trouble? Corporate Responses to Liability Risk.” Review of Financial Studies, 24 (2011), 2781–2821.Google Scholar
Holmstrom, B., and Tirole, J.. “Financial Intermediation, Loanable Funds, and the Real Sector.” Quarterly Journal of Economics, 112 (1997), 663–691.Google Scholar
Houston, J.; Jiang, L.; Lin, C.; and Ma, Y.. “Political Connections and the Cost of Bank Loans.” Journal of Accounting Research, 52 (2014), 193–243.Google Scholar
Jensen, M.“Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.Google Scholar
Jiang, W.; Li, K.; and Shao, P.. “When Shareholders Are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Non-Commercial Banking Institutions.” Review of Financial Studies, 23 (2010), 3595–3637.Google Scholar
J. P. Morgan. “The Activist Revolution: Understanding and Navigating a New World of Heightened Investor Scrutiny.” Available at https://www.jpmorgan.com/directdoc/JPMorgan_CorporateFinanceAdvisory_MA_TheActivistRevolution.pdf(2015).Google Scholar
Lim, J.; Minton, B.; and Weisbach, M.. “Syndicated Loan Spreads and the Composition of the Syndicate.” Journal of Financial Economics, 111 (2014), 45–69.Google Scholar
Lin, C.; Ma, Y.; Malatesta, P. H.; and Xuan, Y.. “Ownership Structure and the Cost of Corporate Borrowing.” Journal of Financial Economics, 100 (2011), 1–23.Google Scholar
Lin, C.; Ma, Y.; Malatesta, P. H.; and Xuan, Y.. “Corporate Ownership Structure and Bank Loan Syndicate Structure.” Journal of Financial Economics, 104 (2012), 1–22.Google Scholar
Nash, R.; Netter, J.; and Poulsen, A.. “Determinants of Contractual Relations between Shareholders and Bondholders: Investment Opportunities and Restrictive Covenants.” Journal of Corporate Finance, 9 (2003), 201–232.Google Scholar
Nini, G.; Smith, D.; and Sufi, A.. “Creditor Control Rights and Firm Investment Policy.” Journal of Financial Economics, 92 (2009), 400–420.Google Scholar
Nini, G.; Smith, D.; and Sufi, A.. “Creditor Control Rights, Corporate Governance, and Firm Value.” Review of Financial Studies, 25 (2012), 1713–1761.Google Scholar
Rajan, R., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559–586.Google Scholar
Roberts, M., and Sufi, A.. “Control Rights and Capital Structure: An Empirical Investigation.” Journal of Finance, 64 (2009a), 1657–1695.Google Scholar
Roberts, M., and Sufi, A.. “Renegotiation of Financial Contracts: Evidence from Private Credit Agreements.” Journal of Financial Economics, 93 (2009b), 159–184.Google Scholar
Santos, J.“Banking and Commerce: How Does the United States Compare to Other Countries?” Economic Review, 34 (1998), 14–26.Google Scholar
Santos, J., and Wilson, K.. “Does Banks’ Corporate Control Benefit Firms? Evidence from US Banks’ Control over Firms’ Voting Rights.” Working Paper, Federal Reserve Bank of New York (2009).Google Scholar
Smith, C., and Warner, J.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (1979), 117–161.Google Scholar
Supplementary material: File

Chava et al. supplementary material

Chava et al. supplementary material 1

Download Chava et al. supplementary material(File)
File 44.6 KB