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

Sudheer Chava, Rui Wang and Hong Zou

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 2, 481-512

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.

Date: 2019
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