Creditor control rights and resource allocation within firms

We examine the within-firm resource allocation and restructuring outcomes at firms violating debt covenants. Using establishment-level data from US Census Bureau, we find that covenant violations are followed by reductions in employment, investment, more frequent establishment closures among firms’ noncore business lines less productive establishments. These changes concentrated establishments which manager-shareholder agency costs pronounced when key lenders have industry experience. Our findings suggest enhanced creditor control reduces managerial encourages a efficient of resources within boundaries technical default.