Does Renegotiation of Financial Contracts Matter for Shareholders? Empirical Evidence from Europe
44 Pages Posted: 16 Nov 2012
Date Written: November 14, 2012
Using a large sample of bank loan renegotiations by European firms, I show that renegotiation of financial contracts matters for shareholders and can increase their wealth. I find that amendments to financial covenants and to loan amounts increase borrower’s cumulative abnormal return by 10% to 15%. Early and less frequent renegotiations of bilateral loans with short maturity also imply a positive stock market reaction. Amendments signaling the early accrual of new, valuable and positive information allow increasing shareholders value. The renegotiation of financial contracts bears a certification role as contracts become more efficient over time, to the benefits of the shareholders.
Keywords: renegotiation, financial contracts, bank loans, shareholders value, event studies, Europe
JEL Classification: G14, G20
Suggested Citation: Suggested Citation