Managerial capital and firm types: findings from private bond contracts

Abstract

Field experiments have variously discovered that modern management practices enhance productivity, but not all firms adopt such practices. In this study, we examine private bond contracts used by the public house operators to explore if such variations are due to the differences in the types of the firms. Bond covenants make management actions in areas such as acquisitions and disposals contingent on meeting specified performance targets. We find that managed firms that provide greater flexibility in managing their operations are more responsive to these constraints than tenanted firms. The significant variations in the propensity of the firms to respond to covenant restrictions suggest that firms vary in their capacity to take different management actions.

Keywords:

• firm types
• managerial capital
• bond covenants
• acquisitions
• disposals

JEL Classification:

• M20
• G34
• L66

Acknowledgements

We thank Peter Abell, Antoine Faure-Grimaud, Lyn Thomas, Johnnie Johnson and seminar participants at LSE, Imperial College and Cambridge for helpful discussions and suggestions. BNP Paribas is not responsible for any comments or ideas expressed in this article.

All remaining errors are our own.

Notes