Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

6-2009

Publication Source

Journal of Financial Economics

Volume

92

Issue

3

Start Page

400

Last Page

420

DOI

10.1016/j.jfineco.2008.04.008

Abstract

We present novel empirical evidence that conflicts of interest between creditors and their borrowers have a significant impact on firm investment policy. We examine a large sample of private credit agreements between banks and public firms and find that 32% of the agreements contain an explicit restriction on the firm's capital expenditures. Creditors are more likely to impose a capital expenditure restriction as a borrower's credit quality deteriorates, and the use of a restriction appears at least as sensitive to borrower credit quality as other contractual terms, such as interest rates, collateral requirements, or the use of financial covenants. We find that capital expenditure restrictions cause a reduction in firm investment and that firms obtaining contracts with a new restriction experience subsequent increases in their market value and operating performance.

Copyright/Permission Statement

© 2009. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

investment, financial constraints, covenants, capital expenditures

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Date Posted: 27 November 2017

This document has been peer reviewed.