Debt Covenant Renegotiation and Investment

Marc Arnold, Ramona Westermann

Research output: Working paperResearch


This paper analyzes the impact of debt covenant renegotiation outside corporate distress on firms. We study a structural model of a levered firm that can renegotiate debt both at investment and in corporate distress. Covenant renegotiation at investment reduces the agency cost of debt because it induces a firm value maximizing investment financing policy and mitigates the overinvestment problem. Incorporating renegotiation outside corporate distress is crucial to explain empirical occurrence patterns of debt renegotiation, the impact of debt renegotiation on corporate securities, and the relation between observed covenant structures
and firm characteristics. It also offers a rich set of novel predictions.
Original languageEnglish
Place of PublicationSt. Gallen
PublisherUniversität St. Gallen
Number of pages48
Publication statusPublished - 2015
SeriesSOF Working Paper


  • Debt covenants
  • Corporate Investment
  • Renegotiation
  • Capital structure

Cite this