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Bargaining power and renegotiation of small private debt contracts

Author

Listed:
  • José Valente

    (University of Coimbra, CeBER, Faculty of Economics)

  • Mário Augusto

    (University of Coimbra, CeBER, Faculty of Economics)

  • José Murteira

    (University of Coimbra, CeBER, Faculty of Economics)

Abstract

The present study is focused on the renegotiation of small debt contracts for small and medium-sized enterprises (SMEs). We use a proprietary database from a Brazilian bank and find that, when compared to large loans, the probability of renegotiation of small loans is much lower. We argue that this is due to the lack of ex-ante contingencies in this kind of loan, which reduces the transfer of control to the lender in situations in which the borrower is not in financial distress, and to the lower bargaining power of SMEs when compared to large public companies. We find that borrower delinquency events and borrower bargaining power proxies are positively related to the probability of small loan renegotiation. We also find that delinquency events reduce the probability of borrower-friendly outcomes as well as the number of key contractual terms renegotiated favorably to the borrower. Further, we find that the borrower’s bargaining power increases the likelihood that the borrower will obtain a favorable outcome and a greater number of favorable key contractual terms in the outcome of the renegotiation.

Suggested Citation

  • José Valente & Mário Augusto & José Murteira, 2022. "Bargaining power and renegotiation of small private debt contracts," Annals of Finance, Springer, vol. 18(4), pages 485-510, December.
    • Handle: RePEc:kap:annfin:v:18:y:2022:i:4:d:10.1007_s10436-022-00413-y
    DOI: 10.1007/s10436-022-00413-y
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    More about this item

    Keywords

    Loan renegotiation; Control rights; Bargaining power; Small debt contracts;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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