David Becher is David Cohen Research Scholar and Associate Professor of Finance; Thomas Griffin is a Ph.D. Candidate in Finance; and Greg Nini is Assistant Professor of Finance, all at Drexel University LeBow College of Business. This post is based on their recent paper.
Corporate creditors play an important role in firm governance. For example, Lee Enterprises, Inc. reported in their third quarter 2008 financial statement that “the Company’s strategies are to increase its share of local advertising through increased sales activities in its existing markets and, over time, to increase its print and online audiences through internal expansion … [and] acquisitions.” [1] The company financed these plans, in part, with a credit facility containing a minimum net worth covenant. In the fourth quarter, Lee’s net worth fell below the contractual limit, resulting in a violation of the credit agreement. To remedy this, Lee Enterprises and their lenders amended the credit agreement to “modify other covenants, including restricting the Company’s ability to make additional investments and acquisitions without the consent of its Lenders.” [2]