2026-09-19T23:49:38Zhttps://dspace.mit.edu/server/oai/requestoai:dspace.mit.edu:1721.1/1067502026-06-17T14:47:09Zcom_1721.1_7582com_1721.1_7581col_1721.1_131022
Joseph Weber.
Saavedra Lux, Daniel Andres
Sloan School of Management.
Sloan School of Management
2017-01-30T19:16:39Z
2017-01-30T19:16:39Z
2015
2015
http://hdl.handle.net/1721.1/106750
969447918
Thesis: Ph. D., Massachusetts Institute of Technology, Sloan School of Management, 2015.
Cataloged from PDF version of thesis.
Includes bibliographical references (pages 44-49).
I investigate whether and how expected future contract renegotiation considerations affect the type of covenants used in ex-ante debt contracts. I find that when future contract renegotiation costs are expected to be high, debt contracts are less likely to include covenants that restrict the borrower's financial flexibility in good states. This finding suggests that when renegotiation costs are high, borrowers and lenders avoid the use of covenants that are more likely to hold up the borrower and force it to bypass value-enhancing corporate policies (e.g., investments). Consistent with this interpretation, the negative relationship between renegotiation costs and the presence of flexibility-reducing covenants becomes stronger when the borrower has fewer outside options and financial flexibility becomes more valuable. Finally, I find that when future renegotiation costs are expected to be high, debt contracts have more covenants that are directly linked to the current performance of the borrower, which allows for a more efficient allocation of decision rights between the borrower and lenders. Overall, this study provides initial evidence about how renegotiation considerations affect the design of covenant packages in debt contracts.
by Daniel Andres Saavedra Lux.
Ph.D.
3, 68 pages
eng
Massachusetts Institute of Technology
MIT theses are protected by copyright. They may be viewed, downloaded, or printed from this source but further reproduction or distribution in any format is prohibited without written permission.
http://dspace.mit.edu/handle/1721.1/7582
Sloan School of Management.
Renegotiation and the choice of covenants in debt contracts
Thesis
application/pdf
Publication
unknown
unknown
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<Abstract>I investigate whether and how expected future contract renegotiation considerations affect the type of covenants used in ex-ante debt contracts. I find that when future contract renegotiation costs are expected to be high, debt contracts are less likely to include covenants that restrict the borrower's financial flexibility in good states. This finding suggests that when renegotiation costs are high, borrowers and lenders avoid the use of covenants that are more likely to hold up the borrower and force it to bypass value-enhancing corporate policies (e.g., investments). Consistent with this interpretation, the negative relationship between renegotiation costs and the presence of flexibility-reducing covenants becomes stronger when the borrower has fewer outside options and financial flexibility becomes more valuable. Finally, I find that when future renegotiation costs are expected to be high, debt contracts have more covenants that are directly linked to the current performance of the borrower, which allows for a more efficient allocation of decision rights between the borrower and lenders. Overall, this study provides initial evidence about how renegotiation considerations affect the design of covenant packages in debt contracts.</Abstract>
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