I investigate whether the impact of financial covenant violations on corporate financing policy varies across countries depending on differences in legal enforcement. Covenant violations trigger creditors to use their contractual acceleration and termination rights to increase interest rates or halt any further supply of credit. For a sample of 518 firms in 28 countries, I find that the presence of strong enforcement alleviates a reported decline in net debt issuance following a covenant violation by close to 10%. The results are robust to alternative specifications, the inclusion of a number of control variables and country characteristics, and the use of alternative proxies for legal enforcement and creditor rights. This paper identifies a novel channel, debt covenants, through which creditors respond to the contracting environment, and emphasizes the importance of legal enforcement to financing activity.

We investigate the impact of “learning from peers” on the fundraising abilities of startup companies. Employing data on the financing rounds of privately owned portfolio companies, we find that companies observe the round amounts of their most successful peers and learn to negotiate higher round amounts with venture capital investors. We further show that the number of common directors or venture capital firms between portfolio companies and their most successful peers has a positive impact on the round amounts of these portfolio companies, which supports the existence of conversational learning. Moreover, observational learning from peers is higher in hot markets, where investors rely on less costly information on peers. Our findings confirm that both observational and conversational learning allow portfolio companies to be in a better negotiating position, thus enhancing their ability to secure funding and invest in their growth.

We investigate the impact of debt covenants on acquisition characteristics. We find that acquirers with covenants pay lower merger premiums, make more focused acquisitions, and engage in acquisitions with higher synergy gains and higher acquirer returns around deal announcement, relative to those without. All these results are more pronounced with stricter debt covenants. Additionally, acquirers with covenants pay with a lower share fraction. In particular, capital covenants, which restrict debt issuance, are positively related to the share fraction, while performance covenants, which affect the stock of equity capital, result in a lower share fraction of payment. All our results hold only for acquirers who have not violated covenants, reemphasizing the importance of debt covenants and the threat they entail on corporate policies even before nearing violation states. Results also, generally, hold for badly governed firms, suggesting that creditors' monitoring role through debt covenants and borrower's effective corporate governance are substitutes.

We investigate the behavior of analyst earnings forecast error in response to policy uncertainty. We find that the accuracy of analyst forecasts is compromised at times of increased economic policy uncertainty, when market volatility and information opacity are high. This negative association between policy uncertainty and earnings forecast accuracy is alleviated in firms where good CSR practices are in place. The disclosure of CSR-related nonfinancial information reportedly improves forecast accuracy; in the context of policy uncertainty, we document that CSR plays a stabilizing role by moderating analyst forecast error. Additionally, we report that the moderating effect of CSR is more pronounced in domestic rather than multinational firms, where, for the former, analysts are able to better assess the quality of information. Finally, we observe that analysts attach more value to the external legitimacy aspect of CSR rather than internal sustainability in guaranteeing earnings resilience in the face of high policy uncertainty. Our results remain valid in various robustness settings.

We examine how capital structure considerations affect acquisition pricing and valuation. We find that debt capacity improvement is value-enhancing for all acquirers when they gradually reveal their growth opportunities to the market. This is reflected in the long-run stock market returns, both 12- and 24-months after acquisition announcement. While both overlevered and underlevered acquirers benefit from an increase in debt capacity resulting from the merger, only overlevered acquirers pay higher premiums to increase debt capacity. Underlevered acquirers do not pay a premium for it; instead they consider market timing opportunities. Results are robust for alternative definitions of leverage and debt capacity improvement.