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How Does Financing Impact Investment? The Role of Debt Covenants
Author(s) -
CHAVA SUDHEER,
ROBERTS MICHAEL R.
Publication year - 2008
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01391.x
Subject(s) - loan , investment (military) , debt , finance , creditor , monetary economics , agency cost , business , control (management) , internal financing , economics , financial system , corporate governance , management , politics , political science , law , shareholder
We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations in which agency and information problems are relatively more severe, highlighting how the state‐contingent allocation of control rights can help mitigate investment distortions arising from financing frictions.