Long-run Performance of Debt Renegotiations: Large-Sample Evidence

Abstract

We examine the long-run performance of over 16,000 debt renegotiations. We find that, compared with non-renegotiating firms matched on size, book-to-market, profitability, and investment, renegotiating firms deliver 13% (20%) higher stock returns over the three (five) years following the renegotiation. This renegotiation effect is strongest for waivers and for amendments to loan interest rates and financial covenants. Renegotiations lead to improvements in accounting-based performance measures including return on assets, cash flow from operations, and financial distress. Consistent with incomplete contract theory, our evidence shows that renegotiations alleviate ex-post inefficiencies in credit agreements and produce long-term gains for the borrower.