Scope for Renegotiation in Private Debt Contracts
Valeri V. Nikolaev
University of Chicago - Booth School of Business
March 30, 2013
Frequent contract renegotiation is a puzzling phenomenon. I study whether debt contract renegotiation can be explained by contracting frictions and the associated contract design choices. In line with theory, the scope for renegotiation is higher among companies with higher uncertainty, greater agency conflicts, and lower information frictions. Syndicate size and performance pricing are associated with a lower scope for renegotiation. The opposite is true for creditor control rights that include restrictions on managerial actions, covenants, and borrowing bases. This result is consistent with strategic control allocation triggering renegotiation. The findings are also consistent with renegotiation having ex ante efficiency implications.
Number of Pages in PDF File: 49
Keywords: contract renegotiation, time to renegotiation, contract design
JEL Classification: G32
Date posted: March 2, 2012 ; Last revised: April 2, 2013
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