Scope for Renegotiation in Private Debt Contracts

64 Pages Posted: 2 Mar 2012 Last revised: 1 Nov 2016

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: July 1, 2016

Abstract

I provide new evidence on the renegotiation of financial contracts using a comprehensive sample of over 90,000 debt contract renegotiations. I study whether the demand for monitoring determines the renegotiation intensity, defined as either the renegotiation frequency over a period of time or the time between renegotiations. Theory suggests that frequent debt contract renegotiation trades off the benefits of enhanced monitoring with the costs of suboptimal creditor intervention. Consistent with this tradeoff, I find that proxies for the increased demand for monitoring, such as financing constraints and the audit premium, exhibit a higher renegotiation intensity. In turn, the costs of creditor monitoring, proxied by the presence of growth options and R&D, are associated with a lower renegotiation intensity. I also find that contractual monitoring mechanisms, such as syndicate concentration and control rights, exhibit robust positive associations with renegotiation intensity. The evidence supports theories that emphasize the strategic aspect of control rights. Finally, renegotiations reveal new information to the market, consistent with their role in reducing information asymmetries. Overall, the evidence suggests the demand for monitoring is an important driver of renegotiation.

Keywords: Debt contract renegotiation, contracting costs, monitoring, creditor control rights.

JEL Classification: G21, G32, G34, M41

Suggested Citation

Nikolaev , Valeri V., Scope for Renegotiation in Private Debt Contracts (July 1, 2016). Chicago Booth Research Paper No. 15-15. Available at SSRN: https://ssrn.com/abstract=2012526 or http://dx.doi.org/10.2139/ssrn.2012526

Valeri V. Nikolaev (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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