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On debt service and renegotiation when debt-holders are more strategic

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  • Bourgeon, Jean-Marc
  • Dionne, Georges

Abstract

The contingent claims analysis of firm financing often presents a debt renegotiation game with a passive bank that does not use its ability to force liquidation strategically, contrary to what is observed in practice. We consider two motives that may lead a bank to refuse to renegotiate: maintaining its reputation to preserve its future lending activity and deterring firms from overstating their debt service abatement when they renegotiate. We show that with public information and private debt only, the optimal probability of debt renegotiation is high when the firm’s anticipated liquidation value is high. Under asymmetric information about liquidation value, the high liquidation value firm may be tempted to mimic the low liquidation value firm to reduce its debt service. To deter such mimicking, banks may sometimes refuse to renegotiate with firms having a low liquidation value.

Suggested Citation

  • Bourgeon, Jean-Marc & Dionne, Georges, 2013. "On debt service and renegotiation when debt-holders are more strategic," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 353-372.
    • Handle: RePEc:eee:jfinin:v:22:y:2013:i:3:p:353-372
    DOI: 10.1016/j.jfi.2012.09.002
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    Cited by:

    1. James N. Conklin & Moussa Diop & Thao Le & Walter D’Lima, 2019. "The Importance of Originator-Servicer Affiliation in Loan Renegotiation," The Journal of Real Estate Finance and Economics, Springer, vol. 59(1), pages 56-89, July.
    2. Carey, Mark & Gordy, Michael B., 2021. "The bank as Grim Reaper: Debt composition and bankruptcy thresholds," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1092-1108.
    3. Dionne, Georges & Laajimi, Sadok, 2012. "On the determinants of the implied default barrier," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 395-408.
    4. Christophe J. Godlewski, 2019. "Debt Renegotiation and the Design of Financial Contracts," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(2), pages 191-215, June.
    5. Godlewski, Christophe J., 2020. "How legal and institutional environments shape the private debt renegotiation process?," Journal of Corporate Finance, Elsevier, vol. 62(C).
    6. Christophe J. GODLEWSKI, 2017. "Initial conditions and the private debt renegotiation process," Working Papers of LaRGE Research Center 2017-03, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    7. Christophe J. GODLEWSKI, 2014. "What drives the dynamics of bank debt renegotiation in Europe? A survival analysis approach," Working Papers of LaRGE Research Center 2014-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    8. Godlewski, Christophe J., 2014. "The determinants of multiple bank loan renegotiations in Europe," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 275-286.
    9. Godlewski, Christophe J., 2015. "The certification value of private debt renegotiation and the design of financial contracts: Empirical evidence from Europe," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 1-17.
    10. Jiri Chod & Jianer Zhou, 2014. "Resource Flexibility and Capital Structure," Management Science, INFORMS, vol. 60(3), pages 708-729, March.
    11. Godlewski, Christophe J., 2015. "The dynamics of bank debt renegotiation in Europe: A survival analysis approach," Economic Modelling, Elsevier, vol. 49(C), pages 19-31.
    12. Dan A. Iancu & Nikolaos Trichakis & Gerry Tsoukalas, 2017. "Is Operating Flexibility Harmful Under Debt?," Management Science, INFORMS, vol. 63(6), pages 1730-1761, June.

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    More about this item

    Keywords

    Debt service; Debt renegotiation; Recovery rate; Strategic bank; Bankruptcy; Contingent claim;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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