Debt Covenant Renegotiation and Investment

Arnold, Marc; Westermann, Ramona

doi:10.2139/ssrn.2632009

Cited by 2 publications

(2 citation statements)

References 88 publications

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“…More recently, Arnold and Westermann (2015) show that covenant renegotiation may resolve agency cost of debt, including debt overhang. The theory, as is well developed and easily understood, however, has never been directly tested.…”

Section: Introductionmentioning

confidence: 99%

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

Chu

2016

SSRN Journal

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This paper studies whether debt renegotiation mitigates debt overhang and improves investment efficiency. Using mergers between lenders participated in the same syndicated loans as natural experiments that exogenously reduce the number of lenders and thus make renegotiation easier, I find that firms affected by the mergers experience more loan renegotiations and increase capital expenditure investment. I also find that the effect is stronger for firms with higher Q, suggesting improved investment efficiency.Further evidence suggests that the effect concentrates on loans without performance pricing provisions and unsecured loans, providing further support that lender mergers improves investment efficiency for firms suffering from debt overhang ex ante.

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Section: Introductionmentioning

confidence: 99%

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

Chu

2016

SSRN Journal

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“…The idea that debt renegotiation can resolve the debt overhang problem is formally modeled in Aivazian andCallen (1980)andGertner andScharfstein (1991), who show that debt renegotiation mitigates underinvestment and restores investment efficiency. More recently, Arnold and Westermann (2015) show that covenant renegotiation may resolve agency cost of debt, including debt overhang. The theory, as is well developed and easily understood, however, has never been directly tested.…”

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confidence: 99%

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

Chu¹

2019

J. Financ. Quant. Anal.

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This article studies whether debt renegotiation mitigates debt overhang and increases corporate investment. Using mergers between lenders participating in the same syndicated loans as natural experiments that reduce the number of lenders and thus make renegotiation easier, I find that the firms affected by the mergers become more likely to renegotiate the loans and increase capital investment. The effect is stronger for firms with higher Q and firms in financial distress, supporting the hypothesis that the lender mergers mitigate the debt-overhang problem.

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Debt Covenant Renegotiation and Investment

Cited by 2 publications

References 88 publications

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

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