Voluntary Bank Debt Renegotiation and Bondholders' Wealth

65 Pages Posted: 14 Dec 2019

See all articles by Nan Yang

Nan Yang

Hong Kong Polytechnic University - School of Accounting and Finance

Date Written: July 25, 2017

Abstract

I utilize bondholder wealth 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. It also rejects the alternative hypothesis that relaxing covenants signals weakened bank monitoring. Bondholders do not react significantly negatively 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.

Keywords: Bank loan, Voluntary renegotiation, bondholder wealth

JEL Classification: G21, G31, G32

Suggested Citation

Yang, Nan, Voluntary Bank Debt Renegotiation and Bondholders' Wealth (July 25, 2017). 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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