Contingency And Renegotiation Of Financial Contracts: Evidence From Private Credit Agreements

Using a large random sample of private credit agreements between US publicly traded firms and financial institutions, the paper shows that over 90% of long-term debt contracts are renegotiated prior to their stated maturity, despite being designed with a number of contingencies that tie the contract terms to future verifiable events. Renegotiations result in material changes to the terms of the contract, and lead to an average effective maturity that is half of the average stated maturity. The empirical model of the bargaining game occurring in renegotiation reveals that new information concerning creditor quality and investment opportunities are the primary determinants of renegotiation outcomes, though fluctuations in the macroeconomic environment and ex ante contingencies in the original contract also play a significant role.