TY  - JOUR
AU  - Benmelech,Efraim
AU  - Bergman,Nittai K.
TI  - Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines 
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14059
PY  - 2008
Y2  - June 2008
UR  - http://www.nber.org/papers/w14059
L1  - http://www.nber.org/papers/w14059.pdf
N1  - Author contact info:
Efraim Benmelech
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-4462
Fax: 847/491-5719
E-Mail: e-benmelech@kellogg.northwestern.edu

Nittai Bergman
MIT Sloan School of Management
100 Main Street, E62-632
Cambridge, MA 02142
Tel: 617/253-2933
Fax: 617/258-6855
E-Mail: nbergman@mit.edu
AB  - 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 downwards 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.
ER  -