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The authors use violations of financial covenants in private credit agreements as indicators of increased creditor intervention and explore changes in stock prices and operating performance following the violation. They find that firms violating a loan covenant experience positive abnormal stock price performance in the months following the violation. Measured in either calendar time or event time, covenant violators earn abnormal returns on the order of 10 to 12% per year beginning within a month of the report of the violation and continuing for at least five years. Given the substantial increase in creditor control over financing and investment decisions that follows a covenant violation, they attribute the positive abnormal returns to increased monitoring and reduced management discretion.
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