Debt Renegotiations Outside Distress

Abstract This article develops a model to explore the implications of nondistressed debt renegotiation on debt prices and corporate policies. The model incorporates the empirical observation that creditors can influence firms also outside corporate distress through debt covenant renegotiation and no...

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Bibliographic Details
Published inReview of Finance Vol. 27; no. 4; pp. 1183 - 1228
Main Authors Arnold, Marc, Westermann, Ramona
Format Journal Article
LanguageEnglish
Published Oxford University Press 14.07.2023
Subjects
Debt pricing
E44
G33
Debt renegotiation
G32
G12
Creditor governance
D92
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Summary:Abstract This article develops a model to explore the implications of nondistressed debt renegotiation on debt prices and corporate policies. The model incorporates the empirical observation that creditors can influence firms also outside corporate distress through debt covenant renegotiation and not only in distress. We find that considering both distressed and nondistressed creditor interventions is key to investigating how creditor governance affects firms. The model explains cross-sectional patterns of control premiums and credit spreads that traditional debt renegotiation models do not capture. We also derive novel implications for the impact of firm characteristics associated with renegotiation on debt prices and corporate policies.
ISSN:1572-3097
1573-692X
1875-824X
DOI:10.1093/rof/rfac059