Creditor Control of Corporate Acquisitions
Year: 2021
Type: article
Abstract: We examine the impact of creditor control rights on corporate acquisitions. Nearly 75$\%$ of loan agreements include restrictions that limit borrower acquisition decisions throughout the life of the contract. Following a financial covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn negative announcement returns. Firms that do announce an acquisition after violating a financial covenant earn 1.8$\%$ higher stock returns, on average, and do not pursue less risky deals. We conclude that creditors use contractual rights and the renegotiation process to limit value-destroying acquisitions driven by managerial agency problems.
Source: Review of Financial Studies
DOI: 10.1093/rfs/hhab075
Authors: David A Becher, Thomas P Griffin, Greg Nini
Institutions: Drexel University, Villanova University
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3173672278