Renegotiation of Financial Contracts: Evidence from Private Credit Agreements
Michael R. Roberts
The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)
University of Chicago - Booth School of Business; NBER
July 31, 2008
Using a large sample of private credit agreements between US publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. Renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. Our analysis of the determinants of renegotiation reveal that the accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. The terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the structure of the contract in a state contingent manner, renegotiation is partially controlled by the contractual assignment of bargaining power.
Number of Pages in PDF File: 63
Keywords: Renegotiation, Bargaining, Incomplete Contracts, Security Design, Bank Loans
JEL Classification: G32, G21, C78, L14
Date posted: September 28, 2007 ; Last revised: December 13, 2011
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