Debt covenant renegotiation and investment

This paper develops a model with the novel feature that firms can renegotiate debt both in and outside distress. We show that this feature is crucial for debt renegotiation models to explain corporate policies and debt prices. Specifically, the model reflects empirical credit spread patterns, rationalizes the observed joint distribution of corporate events and debt control premiums, and predicts realistic renegotiation timing policies. Incorporating both renegotiation events also generates novel implications for the impact of renegotiable debt on covenant and investment policies