Academic

Today I get to present my latest paper, Private Debt and Corporate Governance, at Larry Ribstein's Corporate Colloquium, which is part of the Program on Business Law and Policy at Illinois.  It's almost (but not quite) ready for public consumption yet, so no link to SSRN today.  But here's the abstract:

The influence of private lenders pervades public companies. From the first day of a lending arrangement, loan covenants and built-in contingency provisions affect managerial decision making. Conventional corporate governance analysis has been slow to notice or incorporate this lender influence. The few prior accounts of creditors? influence over managers have emphasized the drastic actions creditors take when a firm is in serious trouble, overlooking the more routine influence private lenders enjoy even absent financial distress.  In this Essay, I explain the regularity of lender influence on managerial decision making, showing that even routine lender influence may rival the influence of boards of directors. Corporate governance includes more than corporate law, and I argue for a broader conception of corporate governance that incorporates recent learning on lender influence.

While lenders of course intervene when their borrowers encounter distress, recent empirical work demonstrates lender influence at much earlier points in the debtor-creditor relationship, against the conventional wisdom.  In addition to the effects of initial loan terms, a subsequent covenant violation may trigger active lender intervention.  This scenario is commonplace, however, and rarely portends financial distress.  Lenders may pursue a range of responses.  Waiving the violation is the most common response; imposition of additional constraints on managerial discretion is also common.  Calling the loan is quite rare.  Initial covenants and subsequent violations effectively reallocate control from managers to lenders, in a fluid process that commences with the inception of the lending arrangement.  This pervasiveness of lender influence has important implications for corporate governance policy making and future research.

The full draft will be posted soon.