Creditor Control of Corporate Acquisitions

May 03, 2021

David Becher, Professor of Finance, Greg Nini, Associate Professor of Finance, and coauthor show that creditors have substantial power over firms’ merger and acquisition activities, and that creditors provide valuable corporate governance that benefits shareholders by reducing managerial agency costs.

Key Insights

Nearly 75% of private credit agreements restrict companies’ acquisition decisions.
Following a covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity.
These effects are strongest among deals that are expected to earn negative announcement returns. The abnormal return around acquisitions by firms currently in violation of a covenant are 1.8% higher than the analogous returns around other firms’ acquisitions. Moreover, this difference is concentrated among firms with weak external governance.

“Creditor Control of Corporate Acquisitions” by David Becher (Drexel University), Tom Griffin (Villanova University) and Greg Nini (Drexel University).

Read the full paper

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