Contractual Contingencies and Renegotiation: Evidence from the Use of Pricing Grids∗

My results suggest that the primary role of performance pricing in bank debt contracts is to delay costly renegotiation. This effect is concentrated in long-term loans, indicating that the renegotiation reduction benefits of pricing grids are larger for long maturities. For instance, a five-year loan with a pricing grid is refinanced for pricing-related reasons on average a year later than a similar loan without such a provision. Since the average time to renegotiation of a five-year loan is roughly 2.5 years, performance pricing allows for substantial savings in contracting costs for non-opaque borrowers. My results also suggest that performance pricing reduces the probability of spread-decreasing outcomes, while having no effect on other types of renegotiation. Thus, pricing grids are most valuable in delaying re-contracting when the credit quality of the borrower improves. JEL Classification: G13; G21; G30