AAA Spark Meeting of Regions

Long-Run Performance of Debt Renegotiations: Large-Sample Evidence

• In Event: Debt Renegotiations, Earnings Predictability and Creditor Rights, Ease of Repossession, and the Cost of Equity Capital

Abstract

We examine the long-run performance of over 17,000 debt renegotiations. We find that, compared with non-renegotiating firms matched on size, book-to-market, profitability, and investment, renegotiating firms, on average, deliver 11 (19) percent higher stock returns over the three (five) years after the renegotiation. This renegotiation effect occurs regardless of the market’s initial reaction, is strongest for lender consents/waivers, decreases with the borrower’s bargaining power, and transcends a selection effect. Renegotiations lead to immediate increases in capital expenditures and working capital, but lagged improvements in earnings and cash flow from operations. Renegotiations followed by larger improvements in accounting fundamentals offer better long-run stock performance.

Authors

• Tracy Xiang, Temple University

• Wei Wang, Temple University

• Sudipta Basu, Temple University