Voluntary Bank Debt Renegotiation, Bondholders' Wealth, and Firm Investment

59 Pages Posted: 14 Dec 2019 Last revised: 7 May 2021

See all articles by Nan Yang

Nan Yang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: May 07, 2021

Abstract

I utilize bondholder wealth and corporate investment effects to test theories of why voluntary bank debt renegotiation happens without any default. Bondholders react positively to renegotiations that relax loan covenants, consistent with Gârleanu and Zwiebel (2009) that lenders transfer control rights back to the firm upon receiving favorable credit information. Positive bondholder reaction also rejects the alternative hypothesis that relaxing covenants signals weakened bank monitoring. Bondholders do not have a negative reaction to the renegotiated loan spread increase. Firms also invest more conservatively after such renegotiations. These results fail to support Gorton and Kahn (2000) that increased loan spread signals that asset substitution cannot be avoided. Lastly, I find that debt overhang is reduced following loan renegotiations that relax covenants.

Keywords: Voluntary Bank Debt Renegotiation, Bank Monitoring, Covenants, Bondholder Wealth, Investment, Debt Overhang, Asset Substitution.

JEL Classification: G14, G21, G31, G32, G34, L14

Suggested Citation

Yang, Nan, Voluntary Bank Debt Renegotiation, Bondholders' Wealth, and Firm Investment (May 07, 2021). Available at SSRN: https://ssrn.com/abstract=3493567 or http://dx.doi.org/10.2139/ssrn.3493567

Nan Yang (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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