Creditor Control of Corporate Acquisitions

We examine the impact of creditor control rights on corporate acquisitions. Nearly 75% of private credit agreements restrict borrower acquisition decisions. Following a covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn negative announcement returns. Firms that do announce an acquisition while in violation of a covenant earn 1.8% higher stock returns, on average, with the effect concentrated among firms with weak external governance. We conclude that creditors provide valuable corporate governance that benefits shareholders by reducing managerial agency costs.