EMPIRICAL STUDIES ON FIRMS’ LEVERAGE AND PRIVATE DEBT RENEGOTIATION

UoM administered thesis: Phd

  • Authors:
  • Anna Neufeld

Abstract

Despite its prominent role in firms’ external financing, debt is highly underrepresented in the academic literature, compared to equity financing (Cumming, 2016). This thesis investigates corporate debt under diverse bankruptcy regulation in Europe (Chapter 1), as well as benefits arising from debt renegotiation among US firms (Chapter 2 and 3). The first study examines whether corporate borrowing responds to the strength of creditor rights, which differ greatly across countries. We use a difference-in-differences (DiD) methodology around an EU-wide bankruptcy reform in 2002 as an exogenous shock that reshaped the institutional environment for corporate debtors and their creditors in Europe. Our findings suggest that subsidiaries in the EU decrease their leverage when they are exposed to less creditor-friendly regimes after 2002, while there is hardly any impact on leverage when shifting to an equally creditor-friendly regime, and even less so when shifting to a more creditor-friendly one. We conclude that the legal environment under which credit is granted matters for firms’ access to finance. The following two studies take a closer look into the bank-firm relationship during which renegotiations of existing loans are frequently observed. While the area of private debt renegotiation (among healthy firms) is not very well researched so far, this is the first study to link between loan renegotiation and firms’ credit rating (Chapter 2) and firms’ adjustments toward capital structure targets (Chapter 3). Firms’ credit rating is important as it determines the rate firms have to pay for private debt and it governs capital requirements of lenders (Basel II and III). The study shows a positive impact on a firm’s credit ratings whenever there was a loan amendment in the month prior to the rating update. Amending loans after the initial loan contract therefore carries signalling power to the capital market (in line with existing literature) and implies benefits to both borrowers and lenders. The third study finds an additional beneficial effect of loan amendments for firms. We investigate whether loan amendments might serve as a channel available to firms to speed up their adjustments toward capital structure targets. Against a broad range of alternative leverage target definitions used in the capital structure literature recently, loan amendments tend to accelerate firms’ speed of adjustments by up to 10.6 percent points within twelve months after the loan has been amended (in addition to firms’ general speed of adjustment). Therefore, our studies provide evidence for additional, novel benefits of corporate debt renegotiation which encourages firms to update and optimise financial contract design even after origination.

Details

Original languageEnglish
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Award date1 Aug 2018