Debt Renegotiations In and Outside Distress: Implications for Corporate Policies and Debt Pricing
67 Pages Posted: 18 Jul 2015 Last revised: 9 Sep 2019
Date Written: September 6, 2019
This paper develops a model with the novel feature that firms can renegotiate debt both in and outside distress. We show that this feature is crucial for debt renegotiation models to explain corporate policies and debt prices. Specifically, the model yields more realistic renegotiation timing policies than the frameworks in the literature, improves our understanding of the drivers behind the level and cross section of credit spreads, and reflects the empirical joint distribution of corporate events and debt control premiums. Incorporating both renegotiation events also generates novel testable implications for the impact of renegotiable debt on covenant and investment policies.
Keywords: Renegotiation, Debt Covenants, Debt Pricing
JEL Classification: D92, E44, G12, G32, G33
Suggested Citation: Suggested Citation