Debt Renegotiations Outside Distress*

Marc Arnold and Ramona Westermann

Review of Finance, 2023, vol. 27, issue 4, 1183-1228

Abstract: This article develops a model to explore the implications of nondistressed debt renegotiation on debt prices and corporate policies. The model incorporates the empirical observation that creditors can influence firms also outside corporate distress through debt covenant renegotiation and not only in distress. We find that considering both distressed and nondistressed creditor interventions is key to investigating how creditor governance affects firms. The model explains cross-sectional patterns of control premiums and credit spreads that traditional debt renegotiation models do not capture. We also derive novel implications for the impact of firm characteristics associated with renegotiation on debt prices and corporate policies.

Keywords: Debt renegotiation; Creditor governance; Debt pricing (search for similar items in EconPapers)
JEL-codes: D92 E44 G12 G32 G33 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:oup:revfin:v:27:y:2023:i:4:p:1183-1228.

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