Abstract
This study examines the design of financial contracts after renegotiations. It focuses on the degree of renegotiation as measured by the number of amendments to the contract. I find that the design of renegotiated financial contracts is not homogenous, although the most frequent amendments are to the loan’s amount and maturity. I show that the number of amendments increases with longer maturities. Collateral and bank reputation have the opposite effect. Creditors friendly environments with fewer renegotiation frictions increase the number of amendments. Overall, contractual, organizational, and legal features have a significant influence on the design of financial contracts after renegotiation.
Highlights
By their nature, loans are flexible contracts that can be revised and amended from time to time and this flexibility is considered one of the major advantages of corporate financing through bank loans
Are amendments marginal, with few loan characteristics being renegotiated? Or on the contrary, are all contract terms amended during a renegotiation? This is a crucial issue because of the role of debt contract design for firm’s investment, operating and financing policies, with important consequences for the company’s stakeholders
The main explanations for these findings are related to the impact of contractual frictions on contract design following renegotiation
Summary
Loans are flexible contracts that can be revised and amended from time to time and this flexibility is considered one of the major advantages of corporate financing through bank loans. The willingness for concessions will depend on the borrower’s investment, operational and financial conditions, the potential agency problems, and the lenders situation These elements depend on the bargaining power of the borrower and the lender(s), the contractual allocation of control and decision rights, the informational frictions shaping the initial contract design, and the adverse effects of ex ante incentives. To capture those features, I focus on four categories of variables related to the loan and syndicate structure at origination, the legal environment of the borrower country, and the borrower and lenders financial conditions.
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