Long-run Performance of Debt Renegotiations: Large-Sample Evidence

51 Pages Posted: 8 Nov 2021 Last revised: 22 Sep 2023

See all articles by Zhongnan Xiang

Zhongnan Xiang

University of Warwick, Warwick Business School

Wei Wang

Temple University - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

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

Xiang, Zhongnan and Wang, Wei and Basu, Sudipta, Long-run Performance of Debt Renegotiations: Large-Sample Evidence (September 21, 2023). Fox School of Business Research Paper , Available at SSRN: https://ssrn.com/abstract=3955519 or http://dx.doi.org/10.2139/ssrn.3955519

Zhongnan Xiang

University of Warwick, Warwick Business School ( email )

West Midlands, CV4 7AL
United Kingdom

Wei Wang (Contact Author)

Temple University - Department of Accounting ( email )

Alter Hall 450
1801 Liacouras Walk
Philadelphia, PA 19122
United States

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

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