The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting
Michael R. Roberts
The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)
September 25, 2014
Using data from SEC filings, I show that the typical bank loan is renegotiated five times, or every nine months. The pricing, maturity, amount, and covenants are all significantly modified during each renegotiation, whose timing is governed by the financial health of the contracting parties and uncertainty regarding the borrowers' credit quality. The relative importance of these factors depends on the duration of the lending relationship. I interpret these results in light of financial contracting theories and emphasize that renegotiation is an important mechanism for dynamically completing contracts and for allocating control rights ex post.
Number of Pages in PDF File: 59
Keywords: Contract Renegotiation, Asymmetric Information, Bank Loans, Financial Contracting
JEL Classification: G21, G32, L14, K12
Date posted: December 31, 2010 ; Last revised: September 30, 2014
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