Control Rights and Capital Structure: An Empirical Investigation




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    • Michael R. Roberts is from the Wharton School, University of Pennsylvania. Amir Sufi is from the Booth School of Business, University of Chicago and NBER. We are especially grateful to the editors, Campbell Harvey and John Graham, and two anonymous referees for helpful comments. We also thank Bo Becker (discussant); Alex Butler; Harry DeAngelo; Linda DeAngelo; Peter DeMarzo; Doug Diamond; Christopher Hennessy; Victoria Ivashina (discussant); Steve Kaplan; Anil Kashyap; Mark Leary; Hayne Leland; Mike Lemmon; Atif Mian; Mitchell Petersen (discussant); Raghu Rajan; Josh Rauh; Morten Sorensen; Roberto Wessels; Julie Xu; and Jeffrey Zwiebel; seminar participants at Baruch College, the Federal Reserve Bank of Philadelphia, Rutgers University, the Texas Finance Festival, Texas A&M, the University of California at Berkeley, the University of Chicago, the University of Colorado, the University of Michigan, the University of Pennsylvania, the University of Southern California, and the University of Vienna; and conference participants at the 2007 NYU Stern/NY Fed Conference on Financial Intermediation, 2007 Texas Finance Festival, 2007 Stanford Institute for Theoretical Economics, 2007 Washington University Corporate Finance Conference, and 2007 NYU/NY Fed Conference on Financial Intermediation for helpful discussions. We also thank Rahul Bhargava, Ali Khan, Wang Yexin, and Lin Zhu for excellent research assistance. Roberts gratefully acknowledges financial support from a Rodney L. White Grant and an NYSE Research Fellowship.


We show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy. Net debt issuing activity experiences a sharp and persistent decline following debt covenant violations, when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit. The effect of creditor actions on debt policy is strongest when the borrower's alternative sources of finance are costly. In addition, despite the less favorable terms offered by existing creditors, borrowers rarely switch lenders following a violation.