Briefly explain how shareholders’ control rights differ from the influence that lenders gain through debt covenants.

Expert Solution

Generally Shareholders and Lenders have different levels of cash-flow and control rights.

Lenders are first to claim the cash flow and thus have complete cash flow rights, and very minimal control rights whereas in case of Shareholders, they have higher control rights and thus have complete control of the firm, but have lesser cash flow rights, eg. a bank (Lender) is only concerned with the fixed regular payments (cash flow) which it receives and is not concerned with the internal matters of the firm i.e. control rights like management decisions, voting board of directors etc.

Debt covenants are agreements between the company and its Lenders that the company will operate within the set rules created by lenders. But when the company is in trouble and defaults or violates debt covenants the lender's control rights gets elevated and lenders can put more restrictions on company e.g. dividend payout restrictions.

jeff jeffy answered 2 years ago

Briefly explain how shareholders’ control rights differ from the influence that lenders gain through debt covenants

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