Does renegotiation of financial contracts matter for shareholders? Empirical evidence from Europe
Using a large sample of bank loan renegotiations by European firms, I show that renegotiation of financial contracts matters for shareholders and can increase their wealth. I find that amendments to financial covenants and to loan amounts increase borrower’s cumulative abnormal return by 10% to 15%. Early and less frequent renegotiations of bilateral loans with short maturity also imply a positive stock market reaction. Amendments signaling the early accrual of new, valuable and positive information allow increasing shareholders value. The renegotiation of financial contracts bears a certification role as contracts become more efficient over time, to the benefits of the shareholders.
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