Renegotiation and the Choice of Covenants in Debt Contracts

Incomplete contracting theories build on the idea that it is either not feasible or too costly for contracting parties such as borrowers and lenders to write contracts that perfectly anticipate all future scenarios. As a result, transacting parties are left exposed to the risk that they might face a costly future renegotiation. This expectation can in turn lead to inefficiencies in terms of investment or other value-enhancing corporate decisions. Despite the widespread use of incomplete contracting theories, few if any empirical studies have directly examined the extent to which future renegotiation considerations affect debt contract structures. My paper contributes to … Read more