The Effects of Bank Loan Renegotiation on Corporate Policies and Performance

Abstract

I investigate the effects of bank loan renegotiation on firm’s financial and investment policies, and performances. I employ OLS and endogenous switching regime regressions using a large crosscountry sample of loans issued and amended on a long-time period. I find that bank loan renegotiation has an economically significant and causal impact on financial policy and performances. Renegotiation provides the firm with additional degrees of freedom and unlocks its economic potential, implying important effects of firm’s tangibility, growth, opportunities and cash on financial policy and performances. Bank loan renegotiation also exhibits a certification and signaling effect which can increase the effect of amendments to the credit agreement on firm’s financial policy.