Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines

40 Pages Posted: 12 Mar 2007 Last revised: 23 May 2008

See all articles by Efraim Benmelech

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nittai Bergman

Tel Aviv University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2007

Abstract

How do liquidation values affect financial contract renegotiation? While the 'incomplete contracting' theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downwards when their financial position is sufficiently poor and when the liquidation value of their fleet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real world financial contract renegotiation.

Keywords: Renegotiation, Liquidation Values, Incomplete Contracts, Aircraft

JEL Classification: G33, G34, G32

Suggested Citation

Benmelech, Efraim and Bergman, Nittai, Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines (January 2007). 9th Annual Texas Finance Festival; AFA 2008 New Orleans Meetings Paper. Available at SSRN: https://ssrn.com/abstract=969404 or http://dx.doi.org/10.2139/ssrn.969404

Efraim Benmelech

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman (Contact Author)

Tel Aviv University

Ramat Aviv
Tel-Aviv, 6997801
Israel

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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