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The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting

59 Pages Posted: 31 Dec 2010 Last revised: 30 Sep 2014

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 25, 2014

Abstract

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.

Keywords: Contract Renegotiation, Asymmetric Information, Bank Loans, Financial Contracting

JEL Classification: G21, G32, L14, K12

Suggested Citation

Roberts, Michael R., The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting (September 25, 2014). Available at SSRN: https://ssrn.com/abstract=1732364 or http://dx.doi.org/10.2139/ssrn.1732364

Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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