The Value of Creditor Governance: Debt Renegotiations In and Outside Distress

Item Type Monograph (Working Paper)

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.

Authors Arnold, Marc & Westermann, Ramona
Language English
Keywords Debt Covenants, Corporate Investment, Renegotiation, Capital Structure
Subjects business studies
HSG Classification contribution to scientific community
Refereed No
Date 2015
Publisher SoF-HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Number 2015/14
Number of Pages 52
Contact Email Address
Depositing User Prof. Dr. Marc Arnold
Date Deposited 17 Aug 2015 15:35
Last Modified 23 Aug 2016 11:22


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Arnold, Marc & Westermann, Ramona: The Value of Creditor Governance: Debt Renegotiations In and Outside Distress. School of Finance Working Paper Series, 2015, 2015/14.

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