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

Marc Arnold, Ramona Westermann

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

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 Sep 201618 Sep 2016
Conference number: 28
http://www.northernfinance.org/

Conference

ConferenceThe 28th Annual Conference of the Northern Finance Association. NFA 2016
Number28
LocationFairmont Tremblant
CountryCanada
CityMont-Tremblant, Québec
Period16/09/201618/09/2016
Internet address

Bibliographical note

CBS Library does not have access to the material

Keywords

  • Debt covenants
  • Corporate investment
  • Renegotiation
  • Capital structure

Cite this

Arnold, M., & Westermann, R. (2016). Creditor Governance and Corporate Policies: The Role of Debt Covenant Renegotiations. Paper presented at The 28th Annual Conference of the Northern Finance Association. NFA 2016, Mont-Tremblant, Québec, Canada.
Arnold, Marc ; Westermann, Ramona . / Creditor Governance and Corporate Policies : The Role of Debt Covenant Renegotiations. Paper presented at The 28th Annual Conference of the Northern Finance Association. NFA 2016, Mont-Tremblant, Québec, Canada.51 p.
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Arnold, M & Westermann, R 2016, 'Creditor Governance and Corporate Policies: The Role of Debt Covenant Renegotiations' Paper presented at, Mont-Tremblant, Québec, Canada, 16/09/2016 - 18/09/2016, .

Creditor Governance and Corporate Policies : The Role of Debt Covenant Renegotiations. / Arnold, Marc; Westermann, Ramona .

2016. Paper presented at The 28th Annual Conference of the Northern Finance Association. NFA 2016, Mont-Tremblant, Québec, Canada.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Creditor Governance and Corporate Policies

T2 - The Role of Debt Covenant Renegotiations

AU - Arnold, Marc

AU - Westermann, Ramona

N1 - CBS Library does not have access to the material

PY - 2016

Y1 - 2016

N2 - 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.

AB - 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.

KW - Debt covenants

KW - Corporate investment

KW - Renegotiation

KW - Capital structure

KW - Debt covenants

KW - Corporate investment

KW - Renegotiation

KW - Capital structure

M3 - Paper

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Arnold M, Westermann R. Creditor Governance and Corporate Policies: The Role of Debt Covenant Renegotiations. 2016. Paper presented at The 28th Annual Conference of the Northern Finance Association. NFA 2016, Mont-Tremblant, Québec, Canada.