Working Paper: NBER ID: w14059
Authors: Efraim Benmelech; Nittai K. Bergman
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: liquidation values; financial contract renegotiation; US airlines
JEL Codes: G33; G34; K12; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Poor financial condition (G33) | Successful renegotiation (L14) |
| Decrease in liquidation values (G33) | Increase in concessions obtained during renegotiation (F51) |
| Financial distress + Low liquidation values (G33) | Successful renegotiation (L14) |
| Bankruptcy (K35) | Significant reduction in lease payments (G32) |
| Decrease in redeployability measure (H56) | Reduction in lease payments (G32) |