The role of loan forbearance in the recovery of financially distressed firms

This paper studies the post-forbearance revenue path of financially distressed firms after borrower-lender renegotiation of debt terms. Using a novel proprietary database from a large Brazilian bank, we estimate a dynamic difference-in-differences model that compares the revenue path of forborne distressed firms before and after renegotiation with that of matched borrowers that were similar before the debt renegotiation event but did not show signs of financial distress. We find no evidence of revenue recovery in the first year after forbearance. In the second year, revenue stabilization is most evident among firms that fully repay their renegotiated loans, while firms that remain under repayment show weaker evidence of revenue stabilization. By contrast, firms that subsequently require additional debt renegotiations or continue to incur losses experience continued revenue deterioration. These patterns are consistent with concerns emphasized in the evergreening and zombie-lending literature, although our design does not directly identify negative-value or zombie firms.