Market Reaction to Debt Renegotiations: Evidence From Brazil

Market Reaction to Debt Renegotiations: Evidence From Brazil

• Author
• João Paulo Augusto Eça
• Co-authors
• Tatiana Albanez
• Abstract

• The theory of incomplete contracts advocates that drawing up contracts capable of predicting all future contingencies is impossible. For this reason, renegotiations are essential for maintaining contracts as they allow for contract adjustments to adapt to new emerging realities. Regarding debt renegotiations, previous studies show that these renegotiations transmit information to the market. More specifically, since creditors collect non-public information from borrowers to make decisions related to debt renegotiation, the renegotiations can offer relevant signals about the borrower's quality, generating the certifying effect in the market.
  Nevertheless, these studies have been contracted in developed economies such as the United States and European countries. Therefore, we aimed to analyze the market reaction to renegotiations in the Brazilian market, whose characteristics differ substantially from those of developed markets (i.e., less liquidity market, more significant information asymmetry, less sophisticated investors, less demanding disclosure requirements, and less enforcement of these disclosures). The sample comprises all 346 non-financial companies listed on the Brazilian stock exchange “B3” (Brasil, Bolsa e Balcão) in 2021. The data analyzed are daily and comprise the period from 2010 to 2021. The results show that, even with emergent market characteristics, there is evidence of a positive market reaction to renegotiations. However, this reaction tends
  to be less intense than those seen in developed economies. These results are new in the literature. To the best of our knowledge, this is the first market reaction study to focus on debt renegotiation. Furthermore, we innovate by addressing capital market debt renegotiations in addition to bank debts traditionally addressed in previous studies. As a practical contribution, the results showed that debt renegotiation disclosure can be a strategy to increase the shareholders’ value perception of the company.
   

• Keywords
• Market Reaction, Debt Renegotiation, Certifying Effect.
• Subject Area
• Asset pricing, investments, and Derivatives

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