Long-run Performance of Debt Renegotiations: Large-Sample Evidence
51 Pages Posted: 8 Nov 2021 Last revised: 22 Sep 2023
Date Written: September 21, 2023
Abstract
We examine the long-run performance of over 17,000 debt renegotiations. We find that, relative to non-renegotiating firms matched on size, book-to-market, profitability, and investment, renegotiating firms deliver 8.8 (16.7) percent higher stock returns on average over the three (five) years after the renegotiation. This renegotiation effect occurs regardless of the market’s initial reaction, is strongest for lender consents/waivers, and is causal. We study three potential channels. Consistent with a knowledge-sharing channel, the long-run effect strengthens when insiders trade around the renegotiation announcement and when private information flows between the contracting parties. Creditor governance also contributes, as renegotiation creates greater value for borrowers with weak internal governance and low bargaining power. Aligned with real options theory, the long-run return rises when borrowers operate in uncertain environments, undertake hard-to-reverse investments, and can time their investments more flexibly.
Keywords: Debt renegotiation, long-run stock return, incomplete contract, real option, knowledge sharing
JEL Classification: G12, G21, G32, M41
Suggested Citation: Suggested Citation