Creditor Control Rights and Resource Allocation within Firms

Nuri Ersahin, Rustom M. Irani and Hanh Le

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: We examine the within-firm resource allocation effects of creditor interventions and their relationship to performance gains at firms violating financial covenants. By linking firm-level data to establishment-level data from the U.S. Census Bureau, we show that covenant violations are followed by large reductions in employment and more frequent establishment sales and closures. These operational cuts are concentrated in violating firms' noncore business lines and unproductive establishments. We conclude that refocusing activities and improving productive efficiency are important mechanisms through which creditors enhance violating firms' performance.

Keywords: Creditor Rights; Covenant Violations; Employment; Asset Sales; Firm Value (search for similar items in EconPapers)
JEL-codes: D22 D24 G21 G31 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2015-11
New Economics Papers: this item is included in nep-cfn and nep-cse
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https://www2.census.gov/ces/wp/2015/CES-WP-15-39.pdf First version, 2015 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:15-39

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