The Impact of Renegotiable Debt on Firms

Marc Arnold, Ramona Westermann

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

This paper develops a model to investigate the impact of renegotiable debt on firms. The novel feature is that firms can renegotiate debt both in distress and outside distress, which allows us to rationalize empirical timing patterns of debt renegotiations. We show that this feature is crucial to explain the cross-section of observed credit spreads and the joint distribution of corporate events and the debt control premium. These debt pricing patterns are not captured by existing models. Incorporating both renegotiation events also generates novel testable implications for the impact of renegotiable debt on corporate policies.
Original languageEnglish
Publication dateDec 2018
Number of pages74
Publication statusPublished - Dec 2018
EventThe 16th International Paris December Finance Meeting - Paris, France
Duration: 20 Dec 201820 Dec 2018
Conference number: 16
https://www.eurofidai.org/fr/conference/paris-december-2018

Conference

ConferenceThe 16th International Paris December Finance Meeting
Number16
CountryFrance
CityParis
Period20/12/201820/12/2018
Internet address

Keywords

  • Renegotiation
  • Debt covenants
  • Debt pricing

Cite this

Arnold, M., & Westermann, R. (2018). The Impact of Renegotiable Debt on Firms. Paper presented at The 16th International Paris December Finance Meeting, Paris, France.
Arnold, Marc ; Westermann, Ramona . / The Impact of Renegotiable Debt on Firms. Paper presented at The 16th International Paris December Finance Meeting, Paris, France.74 p.
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Arnold, M & Westermann, R 2018, 'The Impact of Renegotiable Debt on Firms' Paper presented at, Paris, France, 20/12/2018 - 20/12/2018, .

The Impact of Renegotiable Debt on Firms. / Arnold, Marc; Westermann, Ramona .

2018. Paper presented at The 16th International Paris December Finance Meeting, Paris, France.

Research output: Contribution to conferencePaperResearchpeer-review

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AB - This paper develops a model to investigate the impact of renegotiable debt on firms. The novel feature is that firms can renegotiate debt both in distress and outside distress, which allows us to rationalize empirical timing patterns of debt renegotiations. We show that this feature is crucial to explain the cross-section of observed credit spreads and the joint distribution of corporate events and the debt control premium. These debt pricing patterns are not captured by existing models. Incorporating both renegotiation events also generates novel testable implications for the impact of renegotiable debt on corporate policies.

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KW - Debt covenants

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M3 - Paper

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Arnold M, Westermann R. The Impact of Renegotiable Debt on Firms. 2018. Paper presented at The 16th International Paris December Finance Meeting, Paris, France.