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The Value of Creditor Governance: Debt Renegotiations In and Outside Distress

Marc Arnold () and Ramona Westermann ()

No 1514, Working Papers on Finance from University of St. Gallen, School of Finance

Abstract: This paper analyzes a structural model of a levered firm that can renegotiate debt outside and in distress. The firm renegotiates outside distress to waive its financing covenant when raising investment funds and renegotiates in distress to avoid bankruptcy costs. Incorporating the ability to renegotiate both outside and in distress is crucial to explaining timing patterns of debt renegotiations. Capturing realistic incentives and timing patterns of renegotiations allows us to quantify the value of creditor governance. We explain a rich set of empirical facts in terms of influence of renegotiable debt on security values and corporate policies.

Keywords: Debt Covenants; Corporate Investment; Capital Structure (search for similar items in EconPapers)
JEL-codes: D92 E44 G12 G32 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ger and nep-mac
Date: 2015-07, Revised 2016-07
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Handle: RePEc:usg:sfwpfi:2015:14