Marc Arnold

This article investigates the impact of the observation that managers can use cash to defer bankruptcy on default risk and corporate financial policies. I show that with managerial cash use to defer default, the impact of cash on default risk depends on two opposing channels. While cash provides managers with a buffer against bankruptcy during difficult times, it also reduces equityholders' willingness to contribute funds to the firm, which increases bankruptcy risk. The total impact of cash on default risk is driven by firm and industry characteristics that affect the relative importance of these two channels. As managers' propensity for excess cash holdings depends on this total impact, the model explains observed excess cash levels, their determinants, and a wide range of empirical regularities of corporate cash holdings properties.

This paper develops a structural equilibrium model with intertemporal macroeconomic risk, incorporating the fact that firms are heterogeneous in their asset composition. Compared to firms that are mainly composed of invested assets, firms with growth options have higher costs of debt because they are more volatile and have a greater tendency to default during recession when marginal utility is high and recovery rates are low. Our model matches empirical facts regarding credit spreads, default probabilities, leverage ratios, equity premiums, and investment clustering. Importantly, it also makes predictions about the cross-section of all these features.

This paper investigates the influence of creditor control rights on the pricing and design of corporate loans. We construct a novel dataset, which combines individual borrower, lender, and loan characteristics with covenant violation data. The dataset contains observations, in which borrowers are in violation only with some of their multiple creditors. This data structure allows us to address the endogeneity concerns of the standard quasi-regression discontinuity design that uses covenant violations to identify shifts in creditor control rights. We find that creditors exploit their control rights to overprice new loans and tighten the loan conditions.

This paper investigates the influence of creditor control rights on the pricing of corporate loans. We construct a novel dataset, which combines hand-collected covenant violations data with individual borrower, creditor, and loan contract information. Our data allows us to distinguish between creditors that receive direct control rights after a covenant violation and creditors that do not receive control rights after a violation. By comparing the loan terms of these two creditor types, we can isolate the impact of creditor control rights on loan pricing from the impact of other factors related to a covenant violation. We find that creditors exploit control rights to overprice new loans, and that this rent extraction is a key determinant of the loan premium puzzle.