Bargaining power and renegotiation of small private debt contracts

José Valente (), Mário Augusto () and José Murteira ()
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José Valente: University of Coimbra, CeBER, Faculty of Economics
Mário Augusto: University of Coimbra, CeBER, Faculty of Economics
José Murteira: University of Coimbra, CeBER, Faculty of Economics

Annals of Finance, 2022, vol. 18, issue 4, No 3, 485-510

Abstract: Abstract The present study is focused on the renegotiation of small debt contracts for small and medium-sized enterprises (SMEs). We use a proprietary database from a Brazilian bank and find that, when compared to large loans, the probability of renegotiation of small loans is much lower. We argue that this is due to the lack of ex-ante contingencies in this kind of loan, which reduces the transfer of control to the lender in situations in which the borrower is not in financial distress, and to the lower bargaining power of SMEs when compared to large public companies. We find that borrower delinquency events and borrower bargaining power proxies are positively related to the probability of small loan renegotiation. We also find that delinquency events reduce the probability of borrower-friendly outcomes as well as the number of key contractual terms renegotiated favorably to the borrower. Further, we find that the borrower’s bargaining power increases the likelihood that the borrower will obtain a favorable outcome and a greater number of favorable key contractual terms in the outcome of the renegotiation.

Keywords: Loan renegotiation; Control rights; Bargaining power; Small debt contracts (search for similar items in EconPapers)
JEL-codes: D86 G21 M21 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10436-022-00413-y

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