The role of dynamic renegotiation and asymmetric information in financial contracting

Michael R. Roberts

Journal of Financial Economics, 2015, vol. 116, issue 1, 61-81

Abstract: Using data from Securities and Exchange Commission 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 contracts; Control rights; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G21 G23 G32 K12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (134)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:116:y:2015:i:1:p:61-81

DOI: 10.1016/j.jfineco.2014.11.013

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