Control Rights and Capital Structure: An Empirical Investigation

نویسندگان

  • Michael R. Roberts
  • Amir Sufi
  • Alex Butler
  • Doug Diamond
  • Steve Kaplan
  • Anil Kashyap
  • Mark Leary
  • Mike Lemmon
  • Atif Mian
  • Raghu Rajan
  • Josh Rauh
  • Morten Sorensen
  • Roberto Wessels
چکیده

We show that the misalignment of incentives between firms and their creditors has a larger impact on corporate debt policy than most every previously identified empirical determinant (e.g., size, profitability, asset tangibility, market-to-book, etc.). Using a regression discontinuity design, we find that firms completely shut down their net debt issuing activity in response to debt covenant violations, when creditors use their acceleration and termination rights to address agency conflicts by moderating the supply of credit via price and quantity rationing mechanisms. Further, this reduction is persistent, lasting for over two years, and leads to a corresponding decline in leverage of over 25% relative to the typical variation in leverage. Finally, the financing response to covenant violations exhibits significant cross-sectional variation, and is concentrated in situations where agency and information problems are relatively more severe. As such, our study also highlights how the state contingent allocation of control rights is one specific mechanism by which incentive conflicts are transmitted onto corporate financial policy. A fundamental question in financial economics is: How do firms choose their capital structures? Existing research has focused primarily on the presence of taxes and bankruptcy costs (e.g., Scott (1976), information asymmetry (e.g., Myers and Majluf (1984)), and incomplete markets (e.g., Stiglitz (1974)) as possible answers. However, as Hart (1995) notes, theories predicated on these frictions cannot explain a number of features common to corporate capital structures, such as the prevalence of senior debt or why the failure to repay corporate debt leads to default. Further, the empirical success of these, and other (e.g., Baker and Wurlger (2002)), theories has been limited. Finally, recent evidence in Welch (2004), Lemmon, Roberts, and Zender (2006), and Strebulaev and Yang (2007) suggests that our general understanding of corporate financial policies is far from complete. Thus, while existing research has been informative, a clear implication is that there must be other considerations in addition to those mentioned above that firms take into account when determining their capital structures. The goal of this study is to examine whether incentive conflicts between a company’s managers and its creditors are one such consideration. Specifically, we analyze the response of financial policy to debt covenant violations, which provide a useful setting in which to test this hypothesis for several reasons. First, the existence of covenants in financial contracts is rationalized by the presence of incentive conflicts (Smith and Warner (1979)). Second, covenant violations identify a specific mechanism, the transfer of control rights, by which the misalignment of incentives can impact financial policy (Tirole (2006)). Third, covenant violations occur frequently (Dichev and Skinner (2002)), yet rarely lead to bankruptcy (Gopalakrishnan and Parkash (1995)), and, therefore, are relevant for a large number of firms. Finally, the discrete nature of covenant violations enables us to employ a regression discontinuity empirical strategy in order to address the concern that the covenant violation coincides with a change in other imperfectly observed factors (e.g., investment opportunities) that may affect firms’ financing decisions. Our analysis is carried out using two distinct samples of firms differing in coverage and detail. The first sample is based on a novel data set encompassing all publicly traded firms in the 1 Survey evidence from Graham and Harvey (2001) show that tax and bankruptcy cost considerations rank fourth and seventh, respectively, in terms of their importance in the decision to use debt financing. Studies by Frank and Goyal (2003), Fama and French (2005), and Leary and Roberts (2006) all provide evidence suggesting that the pecking order fails to provide an accurate description of observed financing behavior. Finally, studies by Alti (2006), Hovakimian (2006), Kayhan and Titman (2007), Leary and Roberts (2005), and Liu (2005) all provide evidence refuting the implications of market timing.

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تاریخ انتشار 2007