Initial Conditions and the Private Debt Renegotiation Process
59 Pages Posted: 3 Feb 2017
Date Written: January 9, 2017
I investigate whether and how initial conditions around loan origination influence private debt renegotiation process. I model the renegotiation likelihood, and the conditional probability of multiple renegotiation rounds or multiple amended terms using a sequential logit model. I use a large sample of 15,000 loans on the European credit market. I find that contractual (covenants and collateral) and organizational (lenders pool size, reputation and relationship) mechanisms mitigating adverse selection and moral hazard risks have the largest and positive economic impacts. Lenders financial conditions (capitalization and credit portfolio exposure) and institutional arrangement aiming at creditors protection significantly impact the renegotiation process.
Keywords: Financial Contracts, Private Debt, Renegotiation, Sequential Logit, Europe
JEL Classification: G21, G24, G32, G34
Suggested Citation: Suggested Citation