Debt Renegotiation and Debt Overhang: Evidence from Lender Mergers

Abstract

This paper studies whether debt renegotiation mitigates debt overhang and improves investment efficiency. Using mergers between lenders participated in the same syndicated loans as natural experiments that exogenously reduce the number of lenders and thus make renegotiation easier, I find that firms affected by the mergers experience more loan renegotiations and increase capital expenditure investment. I also find that the effect is stronger for firms with higher Q, suggesting improved investment efficiency.Further evidence suggests that the effect concentrates on loans without performance pricing provisions and unsecured loans, providing further support that lender mergers improves investment efficiency for firms suffering from debt overhang ex ante.