Strategic Default and Renegotiation: Evidence from Commercial Real Estate Loans
June 2022, Working Paper, with I. Serdar Dinc
We study strategic default and its role in the renegotiation of debt contracts in a setting where the borrowers hold multiple loans and the borrower cash flow is disclosed: commercial real estate loans to real estate companies. We find that the majority of defaulted loans are to borrowers that have cash flow to meet their payments on the defaulted loan and that continue to meet their payments in other loans. The pervasiveness of strategic defaults is robust to alternative characterizations. Strategic defaults make loan renegotiations more likely. Our analysis controls for unobservable time-dependent borrower-, lender-, and market-level factors.