Renegotiation of Financial Contracts: Evidence from Private Credit Agreements

Abstract

article in press journal of financial economics 93 (2009) 159–184 contents lists available at sciencedirect journal of financial economics journal homepage: www.elsevier.com/locate/jfec renegotiation of financial contracts: evidence from private credit agreements$ michael r. roberts a,(cid:2), amir sufi b a the wharton school, university of pennsylvania, philadelphia, pa 19104, usa b booth school of business, university of chicago, chicago, il, usa a r t i c l e i n f o a b s t r a c t article history: received 21 may 2008 received in revised form 4 august 2008 accepted 14 august 2008 available online 5 may 2009 jel classifications: g32 g21 l14 keywords: renegotiation bargaining financial contracting using a large sample of private credit agreements between u.s. publicly traded firms and financial institutions, we show that over 90% of long-term debt contracts are renegotiated prior to their stated maturity. renegotiations result in large changes to the amount, maturity, and pricing of the contract, occur relatively early in the life of the contract, and are rarely a consequence of distress or default. the accrual of new information concerning the credit quality, investment opportunities, and collateral of the borrower, as well as macroeconomic fluctuations in credit and equity market conditions, are the primary determinants of renegotiation and its outcomes. the terms of the initial contract (e.g., contingencies) also play an important role in renegotiations; by altering the …

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