George (Yuqi) Gu - Fox School of Business - Temple University

WORKING PAPERS
• “Creditor Control and Corporate Innovations: Evidence from Debt Covenant
Violations” joint with Connie X. Mao (Job Market Paper)
Abstract: In this paper, we investigate the impact of creditor control on corporate innovation
via the lens of corporate events - debt covenant violation, where control right is shifted from
equity-holders to creditors. By employing differences-in-differences tests, we document that
firms experience a significant cut in corporate innovation following financial covenant
breaches, especially in innovation intensive industries. Furthermore, we show that creditor
control plays a direct role in curbing corporate innovative activities upon covenant violations.
We find that in the presence of stronger bank control, violation firms experience a
significantly larger reduction in both the quantity (as measured by number of patents) and
quality (as measured by non-self citations received) of innovations. Interestingly, we find that
banks’ expertise in certain innovative industry can moderate the adverse effect of creditor
control on innovations in those industries. These results are consistent with the argument that
banks are less tolerant of failures and debt covenants restrict manager flexibility. Our findings
also suggest that banks’ experience, knowledge, and expertise in certain innovative industries
allow them to have a better assessment about borrowers’ innovative projects, and thereby
mitigating the agency conflict.
• “Creditor Control and CEO Compensation: Evidence from Debt Covenant Violations”
joint with Connie X. Mao
Abstract: We present evidence that creditor control has significant impact on CEO
compensation. CEOs experience a sharp cut of 17% of excessive pay following financial
covenant violations. Differences-in-differences test shows that the reduction in abnormal
CEO compensations is only associated with violation firms, not with their matched nonviolation
peers during the same time period. Furthermore, we find that the cut in excessive
pay upon violations is greater in firms facing stronger creditor control, i.e., firms borrowed
from banks with which they have a stronger prior lending relationship or high reputation
banks. Despite the fact that the prior literature has documented greater CEO compensations in
firms with weaker shareholder governance, we find that shareholder governance has little
significant impact on the reduction of abnormal CEO compensations following debt covenant
violations. In addition, we find that managerial pay-risk sensitivity (vega) is significantly
reduced after covenant violation, particularly in the presence of greater creditor control power.
In contrast, covenant violations are not associated with any significant change in managerial
pay-performance sensitivity (delta).
• “The Role of Entry Deterrence in Explaining Why Prices Fall During Times of
High Demand” joint with Jose M. Plehn-Dujowich
Abstract: Empirical evidence suggests that for certain products, ranging from groceries to
automobiles, firms lower prices in times of high demand. The theory of perfect competition,
price war models of collusive behavior, and the traditional limit pricing model are
inconsistent with the evidence. This paper proposes that, in the spirit of limit pricing theory,
incumbents lower prices in times of high demand so as to prevent entry into their product
market. We prove this in the context of a standard model of entry deterrence with complete
information and an endogenous number of potential entrants. The incumbent deters entry by
engaging in marginal cost pricing when demand is high because that is when the market to be
monopolized is largest.
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