Debt Renegotiations In and Outside Distress: Implications for Corporate Policies and Debt Pricing

67 Pages Posted: 18 Jul 2015 Last revised: 9 Sep 2019

See all articles by Marc Arnold

Marc Arnold

University of St. Gallen - School of Finance

Ramona Westermann

Copenhagen Business School

Multiple version iconThere are 2 versions of this paper

Date Written: September 6, 2019

Abstract

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

Arnold, Marc and Westermann, Ramona, Debt Renegotiations In and Outside Distress: Implications for Corporate Policies and Debt Pricing (September 6, 2019). University of St.Gallen, School of Finance Research Paper No. 2015/14. Available at SSRN: https://ssrn.com/abstract=2632009 or http://dx.doi.org/10.2139/ssrn.2632009

Marc Arnold

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ramona Westermann (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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