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The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting

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  • Michael R. Roberts

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.

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  • Michael R. Roberts, 2014. "The Role of Dynamic Renegotiation and Asymmetric Information in Financial Contracting," NBER Working Papers 20484, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:20484
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    2. Cadot, Julien & Féral, Arnaud, 2022. "Good Co-ops, Bad Co-ops : Financing Cooperatives in Asymmetric Information," 2022 Annual Meeting, July 31-August 2, Anaheim, California 322550, Agricultural and Applied Economics Association.
    3. Cadot, Julien & Féral, Arnaud, 2023. "Cooperative Finance: Signaling Risk with Investment and Retained Earnings," 2023 Annual Meeting, July 23-25, Washington D.C. 335976, Agricultural and Applied Economics Association.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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