Scope for Renegotiation in Private Debt Contracts
Valeri V. Nikolaev
University of Chicago Booth School of Business
April 15, 2015
Frequent contract renegotiation is a puzzling phenomenon. I attempt to shed more light on this subject by examining the economic determinants and information content of the renegotiations of financial contracts. My sample approximates the population of material private debt contract renegotiations in the U.S. I find that the frequency of renegotiation has a rich set of cross-sectional determinants, including exogenous uncertainty and investment opportunities. One of the strongest determinants of renegotiation frequency is financing frictions (agency and information problems). Because the demand for information increases with such frictions, the evidence is consistent with renegotiation being an integral part of the monitoring process carried out by private lenders. In line with this hypothesis, I also find that the extent to which lenders rely on different monitoring mechanisms is positively associated with renegotiation frequency. Additionally, renegotiations transmit new information to the market, consistent with them revealing the inside knowledge of the borrower available to private lenders. Jointly, the evidence is suggestive of the demand for monitoring being an important economic determinant of renegotiation.
Number of Pages in PDF File: 51
Keywords: contract renegotiation, financing frictions, contract design, information content
JEL Classification: G32
Date posted: March 2, 2012 ; Last revised: July 13, 2015
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