Language and private debt renegotiation

Abstract

We study how language affects private debt renegotiation. We predict that stronger future time reference (FTR) languages alter the importance of renegotiation risk by lowering the perceived value of loan renegotiation. We test this hypothesis on a sample of 6500 loans issued to European firms between 1999 and 2017. We find that the use of a stronger FTR language decreases the likelihood of renegotiation and the number of renegotiation rounds. These findings are robust to several FTR proxies, various specifications including loan, borrower, and country-level variables, and potential mitigation effects from specific loan, country, or time effects. They suggest that linguistic structure influences the renegotiation process of private debt contracts.