Two essays on financial contracting
Abstract
The first essay uses a large sample of private debt renegotiations from 1996 to 2011 and reports that debt covenant renegotiations are common and result in large changes in existing covenant restrictions prior to any covenant violation. Renegotiations of specific covenants are a response to both the distance the covenant variable is from its contractual limit and the firm's specific operating conditions and prospects. Firm's post-renegotiation investment and financial policies are substantially influenced by the covenant changes due to renegotiations. Overall, these findings indicate that, outside of default, creditors demonstrate flexibility in exercising their control rights over important managerial decisions through covenant renegotiations. The second essay uses three measures of covenant restrictiveness to examine whether the initial covenant restrictions and the ex post loan outcomes are connected. I find that contracts with higher level of covenant restrictiveness at loan origination are more likely to subsequently experience covenant violations and renegotiations. These findings support the view that highly restrictive covenants are designed to transfer decision rights to creditors and are inconsistent with the view that highly restrictive covenants incorporate favorable information about the borrowers so as to signal future improvements in the underlying covenant variables. Overall, my results imply that the ex ante design of covenant restrictiveness plays an important role in the ex post transfer of control rights.
Degree
Ph.D.
Advisors
Denis, Purdue University.
Subject Area
Finance|Economic theory
Off-Campus Purdue Users:
To access this dissertation, please log in to our
proxy server.