Federal Dposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2007-01
Creditor Control Rights and Firm Investment Policy*
November 2006
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2007-01
Creditor Control Rights and Firm Investment Policy*
November 2006
Empirical Comparisons and Implied Recovery Rates
kkk
An Empirical
An Empirical Analysis
State-
Efraim Benmel Efraim Benmelech May, 2005
June 20
May , 2005 Asset S2005-14
September 2005
Creditor Control Rights and Firm Investment Policy*
Greg Nini
Board of Governors of the Federal Reserve System
David C. Smith
University of Virginia, McIntire School of Commerce
Amir Sufi
University of Chicago, Graduate School of Business
November 2006
Abstract
We provide novel empirical evidence of a direct contracting channel through which firm financial policy
affects firm investment policy. We examine a large sample of private credit agreements between banks
and publicly traded U.S. corporations and find that 32% of the agreements contain an explicit restriction
on the firm’s capital expenditures. Creditors are more likely to impose a restriction following negative
borrower performance, and the effect of negative performance on the likelihood of facing a capital
expenditure restriction is larger than the effect of negative performance on other loan terms such as the
interest spread or pledging of collateral. We also demonstrate that the restrictions affect firm investment
policy. For example, we show that most of the actual capital expenditures of borrowers with restrictions
cluster just below their restricted amount, while in the year prior to the contract, the same borrowers’
capital expenditures are distributed evenly above and below the restriction. Our results are consistent
with control-based theories of financing in which creditors retain control rights over investment policy as
a second-best solution to agency conflicts.
*We thank Ken Ayotte, Allen Berger, Mark Carey, Michael Faulkender, Christopher Hennessy, Steven Kaplan, Atif
Mian, Joshua Rauh, Michael Roberts, Carola Schenone, Morten Sorensen, and Philip Strahan for helpful comments.
This work benefited greatly from seminar participants at the University of Virginia, the University of Delaware, the
Board of Governors of the Federal Reserve, the University of Kentucky (Gatton), Cornell University (Johnson), the
University of Chicago GSB, and the FDIC Center for Financial Research. We acknowledge excellent research
assistance by Rahul Bhargava, Peiju Huang, and Lin Zhu. Sufi thanks the FDIC Center for Financial Research and
the Center for Research in Securities Prices for financial support.
Greg Nini
Board of Governors of the Federal Reserve System
David C. Smith
University of Virginia, McIntire School of Commerce
Amir Sufi
University of Chicago, Graduate School of Business
November 2006
Abstract
We provide novel empirical evidence of a direct contracting channel through which firm financial policy
affects firm investment policy. We examine a large sample of private credit agreements between banks
and publicly traded U.S. corporations and find that 32% of the agreements contain an explicit restriction
on the firm’s capital expenditures. Creditors are more likely to impose a restriction following negative
borrower performance, and the effect of negative performance on the likelihood of facing a capital
expenditure restriction is larger than the effect of negative performance on other loan terms such as the
interest spread or pledging of collateral. We also demonstrate that the restrictions affect firm investment
policy. For example, we show that most of the actual capital expenditures of borrowers with restrictions
cluster just below their restricted amount, while in the year prior to the contract, the same borrowers’
capital expenditures are distributed evenly above and below the restriction. Our results are consistent
with control-based theories of financing in which creditors retain control rights over investment policy as
a second-best solution to agency conflicts.
*We thank Ken Ayotte, Allen Berger, Mark Carey, Michael Faulkender, Christopher Hennessy, Steven Kaplan, Atif
Mian, Joshua Rauh, Michael Roberts, Carola Schenone, Morten Sorensen, and Philip Strahan for helpful comments.
This work benefited greatly from seminar participants at the University of Virginia, the University of Delaware, the
Board of Governors of the Federal Reserve, the University of Kentucky (Gatton), Cornell University (Johnson), the
University of Chicago GSB, and the FDIC Center for Financial Research. We acknowledge excellent research
assistance by Rahul Bhargava, Peiju Huang, and Lin Zhu. Sufi thanks the FDIC Center for Financial Research and
the Center for Research in Securities Prices for financial support.