Debt Covenant Renegotiations and Creditor Control Rights

56 Pages Posted: 29 Aug 2013 Last revised: 15 Nov 2013

David J. Denis

University of Pittsburgh

Jing Wang

University of Nebraska at Lincoln - Department of Finance

Date Written: November 14, 2013

Abstract

Using a large sample of private debt renegotiations from 1996 to 2011, we report that, even in the absence of any covenant violation, debt covenants are frequently renegotiated. These renegotiations primarily relax existing restrictions and result in economically large changes in existing limits. Renegotiations of specific covenants are a response to both the distance the covenant variable is from its contractual limit and the firm’s specific operating conditions and prospects. Moreover, the borrower’s post-renegotiation investment and financial policies are strongly associated with the covenant changes resulting from the renegotiation. Overall, these findings imply that, even outside of default states, creditors have strong control rights over the borrower’s operating and financial policies, and exercise these rights in a state contingent manner through covenant renegotiations.

Keywords: debt contracting, creditor control rights, investment policy, financing policy

JEL Classification: G21, G31, G32

Suggested Citation

Denis, David J. and Wang, Jing, Debt Covenant Renegotiations and Creditor Control Rights (November 14, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2317941 or http://dx.doi.org/10.2139/ssrn.2317941

David J. Denis

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Jing Wang (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

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