Loan amendments and capital structure

We study amendments of loan contracts and find that loan amendments (LAs) help firms move towards their target capital structures. LAs incur lower transaction costs than new loans or bond issues. Using data on 10,375 LAs of large, US corporations during 1996–2016, we find that LA firms accelerate their speed of adjustment towards target leverage up to 24 months post-LA. This is most pronounced for under-levered firms. Amendments to loan maturity and covenants have the strongest impact. Our results are robust to using alternative definitions of leverage, leverage targets, loan events, and various econometric specifications including placebo and treatment-effect models. • Loan amendments (LAs) help firms move towards their target capital structures. • LA firms accelerate their speed of adjustment towards target leverage up to 24 months post-LA. • The acceleration is most pronounced for under-levered firms. • Amendments to loan maturity and covenants have the strongest impact. • Loan contracting on a covenant-lite basis helps LA firms to move towards their target leverage more quickly.