Working Paper: NBER ID: w20484
Authors: Michael R. Roberts
Abstract: Using data from SEC filings, I show that the typical bank loan is renegotiated five times, or every nine months. The pricing, maturity, amount, and covenants are all significantly modified during each renegotiation, whose timing is governed by the financial health of the contracting parties and uncertainty regarding the borrowers' credit quality. The relative importance of these factors depends on the duration of the lending relationship. I interpret these results in light of financial contracting theories and emphasize that renegotiation is an important mechanism for dynamically completing contracts and for allocating control rights ex post.
Keywords: Renegotiation; Financial Contracting; Asymmetric Information
JEL Codes: D82; G21; G23; G32; K12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| borrower behavior influences renegotiation occurrences (G41) | renegotiations are primarily initiated by borrowers (G21) |
| covenant violations lead to renegotiation (L14) | fewer than 28% of renegotiations are due to covenant violations (G32) |
| covenant violations lead to renegotiation (L14) | over 75% of covenant violations lead to renegotiation (L14) |
| financial health of parties influences timing of renegotiations (G32) | financially weak borrowers are more likely to initiate renegotiations (G51) |
| uncertainty regarding future profitability influences timing of renegotiations (D86) | borrowers with uncertain futures are more likely to initiate renegotiations (D86) |
| renegotiation serves as a mechanism to address contractual incompleteness (D86) | dynamic and state-contingent nature of loan contracts (G21) |
| information asymmetry and agency problems are critical elements in contracting environment (D82) | challenges theories based on symmetric information (D82) |
| borrower uncertainty accelerates renegotiation onset (D84) | interest rate changes during renegotiation reflect credit risk (E43) |