The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting

60 Pages Posted: 30 Sep 2014 Last revised: 21 Jun 2021

See all articles by Michael R. Roberts

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

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Date Written: September 2014

Abstract

Using data from SEC filings, I show that the typical bank loan is renegotiated five times, or every nine months. The pricing, maturity, amount, and covenants are all significantly modified during each renegotiation, whose timing is governed by the financial health of the contracting parties and uncertainty regarding the borrowers' credit quality. The relative importance of these factors depends on the duration of the lending relationship. I interpret these results in light of financial contracting theories and emphasize that renegotiation is an important mechanism for dynamically completing contracts and for allocating control rights ex post.

Suggested Citation

Roberts, Michael R., The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting (September 2014). NBER Working Paper No. w20484, Available at SSRN: https://ssrn.com/abstract=2502678

Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

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