Abstract
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.
and firm characteristics. It also offers a rich set of novel predictions.
Original language | English |
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Place of Publication | St. Gallen |
Publisher | Universität St. Gallen |
Number of pages | 48 |
Publication status | Published - 2015 |
Series | SOF Working Paper |
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Number | 2015/14 |
Keywords
- Debt covenants
- Corporate Investment
- Renegotiation
- Capital structure