Creditor control rights and resource allocation within firms

Nuri Ersahin, Rustom M. Irani, Hanh Le

Research output: Contribution to journalArticlepeer-review


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

Original languageEnglish (US)
Pages (from-to)186-208
Number of pages23
JournalJournal of Financial Economics
Issue number1
StatePublished - Jan 2021


  • Control rights
  • Corporate governance
  • Covenant violations
  • Creditors
  • Restructuring

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


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