Finance Seminar（2019-02)

Topic: Time Inconsistency and Financial Covenants

Speaker: Haotian Xiang, The Wharton School, University of Pennsylvania

Time: Friday, 11 January, 10:00-11:30

Location: Room K01, Guanghua Building 2

Abstract:

I investigate how financial covenants influence corporate behavior and firm value by allocating control rights. In a dynamic model with long-term debt, shareholders cannot commit to not expropriate creditors in the future with new debt issuances and risky investments. Creditors intervene upon violations of covenant restrictions and restructure the debt without ex ante commitment. I find that financial covenants significantly increase debt capacity, investment and ex ante firm value by disciplining shareholders. However, I show that lenders' inability to commit to a restructuring plan severely impairs contractual efficiency. My analysis suggests that a further tightening of covenants, relative to the calibrated benchmark, improves their role as a commitment device.

Introduction:

Haotian Xiang is a PhD candidate in Finance at the Wharton School of the University of Pennsylvania. He holds a B.A. in Finance from Guanghua School of Management, Peking University. His research interests include corporate finance, financial intermediation and macroeconomics.

//fnce.wharton.upenn.edu/profile/xhaotian

Your participation is warmly welcomed!