Liquidation values and the credibility of financial contract renegotiation

Evidence from U.S. airlines

Efraim Benmelech, Nittai K. Bergman

Research output: Contribution to journalArticle

51 Citations (Scopus)

Abstract

How do liquidation values affect financial contract renegotiation? While the "incomplete-contracting" theory of financial contracting predicts that liquidation values determine the allocation of bargaining power between creditors and debtors, there is little empirical evidence on financial contract renegotiations and the role asset values play in such bargaining. This paper attempts to fill this gap. We develop an incomplete-contracting model of financial contract renegotiation and estimate it using data on the airline industry in the United States. We find that airlines successfully renegotiate their lease obligations downward when their financial position is sufficiently poor and when the liquidation value of their fleet is low. Our results show that strategic renegotiation is common in the airline industry. Moreover, the results emphasize the importance of the incomplete contracting perspective to real-world financial contract renegotiation.

Original languageEnglish (US)
Pages (from-to)1635-1677
Number of pages43
JournalQuarterly Journal of Economics
Volume123
Issue number4
DOIs
StatePublished - Nov 1 2008

Fingerprint

Financial contracts
Liquidation
Airlines
Credibility
Renegotiation
Incomplete contracting
Airline industry
Obligation
Empirical evidence
Bargaining power
Asset value
Financial contracting
Lease

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

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Liquidation values and the credibility of financial contract renegotiation : Evidence from U.S. airlines. / Benmelech, Efraim; Bergman, Nittai K.

In: Quarterly Journal of Economics, Vol. 123, No. 4, 01.11.2008, p. 1635-1677.

Research output: Contribution to journalArticle

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