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Creditor Control of Corporate Acquisitions

Author

Listed:
  • David A Becher
  • Thomas P Griffin
  • Greg Nini

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.

Suggested Citation

  • David A Becher & Thomas P Griffin & Greg Nini, 2022. "Creditor Control of Corporate Acquisitions," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1897-1932.
  • Handle: RePEc:oup:rfinst:v:35:y:2022:i:4:p:1897-1932.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab075
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    Citations

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    Cited by:

    1. Sarfraz Hussain & Mohammad Enamul Hoque & Perengki Susanto & Waqas Ahmad Watto & Samina Haque & Pradeep Mishra, 2022. "The Quality of Fair Revaluation of Fixed Assets and Additional Calculations Aimed at Facilitating Prospective Investors’ Decisions," Sustainability, MDPI, vol. 14(16), pages 1-14, August.
    2. Saiying Deng & Yutao Li, 2023. "Creditor control rights and borrower protection: the role of borrower consent clause in private debt contracts," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 357-394, July.
    3. Rainville, Megan & Unlu, Emre & Wu, Juan Julie, 2022. "How do stronger creditor rights impact corporate acquisition activity and quality?," Journal of Banking & Finance, Elsevier, vol. 144(C).
    4. Nguyen, Hien T. & Phan, Hieu V. & Vo, Hong, 2023. "Agency problems and corporate social responsibility: Evidence from shareholder-creditor mergers," International Review of Financial Analysis, Elsevier, vol. 90(C).
    5. Akdoğu, Evrim & Paukowits, Aysun Alp & Celikyurt, Ugur, 2023. "Bondholder governance, takeover likelihood, and division of gains," Journal of Corporate Finance, Elsevier, vol. 79(C).

    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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