Renegotiation and the pricing structure of sovereign bank loans: Empirical evidence
It is generally accepted that banks offer renegotiation services to sovereign borrowers facing short-term liquidity shortages. However, the literature has yet to find evidence of such services from the pricing of sovereign bank loans. The research on the pricing of sovereign bank loans has focused on interest spreads alone, while the pricing structure typically includes an up-front fee, as well. In this paper, I explore empirically the economic motivations for such a pricing structure. I find that up-front fees are explained by the probability of renegotiation and by proxies for informational problems. My findings provide evidence that the unique pricing structure of bank loans helps banks provide sovereign borrowers with renegotiation services.
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