Covenants, Creditors’ Simultaneous Equity Holdings, and Firm Investment Policies

Sudheer CHAVA, Rui WANG*, Hong ZOU

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review

31 Citations (Scopus)


This article analyzes how creditors’ simultaneous debt and equity holdings affect firm investment policies. We find that firms with dual ownership are less likely to have capital expenditure restrictions in loan contracts, and the relation varies in predicted ways with the monitoring needs of borrowers and the monitoring capacity of dual owners. A less frequent use of capital expenditure restrictions, however, does not result in borrowers’ risk-shifting. Dual ownership firms are also more likely to be granted an unconditional waiver and do not significantly reduce debt issuance or investment expenditures after a financial covenant violation. Our results highlight how dual ownership can help mitigate shareholder–creditor conflicts.

Original languageEnglish
Pages (from-to)481-512
Number of pages32
JournalJournal of Financial and Quantitative Analysis
Issue number2
Early online date7 Sept 2018
Publication statusPublished - Apr 2019

Bibliographical note

The authors are listed alphabetically. We thank Paul Malatesta (the editor) and an anonymous referee for insightful comments. This article also benefits from the comments of Tim Adam, Thorsten Beck, Murillo Campello, Chao Chen, Eitan Goldman, Wei Jiang, Madhu Kalimipalli, Kai Li, Tse-Chun Lin, Pedro Matos, Rik Sen, Tao Shu, David Smith, Dragon Tang, Cong Wang, Yihui Wang, Han Xia, and seminar participants at the Chinese University of Hong Kong, City University of Hong Kong, Clemson University, Fudan University, Hong Kong Baptist University, Hong Kong Polytechnic University, Indian Institute of Management Bangalore, Indian School of Business, and Wilfrid Laurier University, as well as participants at the 2015 China International Conference in Finance. We thank Amir Sufi for graciously sharing the loan covenant and violation data.


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