Creditor Governance and Corporate Policies: The Role of Debt Covenant Renegotiations

Marc Arnold, Ramona Westermann

Research output: Contribution to conferencePaperResearchpeer-review


This paper analyzes the impact of debt covenant renegotiations on corporate policies. We develop a structural model of a levered firm that can renegotiate debt both at investment and in corporate distress. Covenant renegotiation at investment disciplines equity holders in their financing and investment decisions and, hence, mitigates the agency cost of debt. Our model explains the empirical intensity and patterns of the occurrence of debt renegotiation. We also quantify the role of debt covenant renegotiations as a governance channel on corporate financial policies and on the value of corporate securities. Additionally, the model offers a rich set of novel testable predictions.
Original languageEnglish
Publication date2016
Number of pages51
Publication statusPublished - 2016
EventThe 28th Annual Conference of the Northern Finance Association. NFA 2016 - Fairmont Tremblant, Mont-Tremblant, Québec, Canada
Duration: 16 Sept 201618 Sept 2016
Conference number: 28


ConferenceThe 28th Annual Conference of the Northern Finance Association. NFA 2016
LocationFairmont Tremblant
CityMont-Tremblant, Québec
Internet address


  • Debt covenants
  • Corporate investment
  • Renegotiation
  • Capital structure

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