Credit Rationing and Heterogeneity in Corporate Loan Contracts

PurposeThis study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how confidentiality strictness impacts covenant design, lending syndicate structure and loan pricing.Design/methodology/approachUsing a sample of 6,327 loan credit agreements originated by US public firms in the period of 1996–2017, this study measures the confidentiality strictness in loan contracts using textual analyses that capture the appearance of confidentiality-related words and the length of confidentiality provision. All regressions include relevant loan characteristics, firm-specific accounting variables, industry and year fixed effects. To address the endogeneity concern, the paper uses borrowing firms' rival cash holdings and R&D expenditures to instrument for confidentiality strictness in two-staged least square regressions.FindingsBorrowers which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, this study reveals that confidentiality strictness is negatively associated with the imposition of financial covenants, especially performance covenants. Loan contracts for borrowers with stricter confidentiality on average have more relaxed covenant intensity, measured by the number of covenants. The study also shows that stricter confidentiality attracts finance companies, which have strong expertise in product markets of their parent firms, into the lending syndicate. However, confidentiality-conscious borrowers with higher degree of information asymmetry are subject to higher loan spreads.Originality/valueThis study provides the first examination of confidentiality policies in loan contracts and supports the idea that loan provisions are not simply made of “boilerplate” language. The results suggest that, for confidentiality-sensitive borrowers, the greater exposure to product market competition helps control managerial slack and substitute monitoring from financial markets.

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Financing successful small business projects

Management Decision ◽

10.1108/md-01-2012-0051 ◽

2014 ◽

Vol 52 (2) ◽

pp. 365-377 ◽

Cited By ~ 7

Author(s):

Irene Comeig ◽

Esther B. Del Brio ◽

Matilde O. Fernandez-Blanco

Keyword(s):

Interest Rates ◽

Project Success ◽

Success Probability ◽

Credit Rationing ◽

Bank Loans ◽

Data Set ◽

Content Type ◽

Loan Contracts ◽

Access To Credit ◽

High Success Probability

Purpose – The current credit rationing strongly influences the viability of SMEs innovation projects. In this context, the practice of screening borrowers by project success probability has become a paramount consideration for both lenders and firms. The aim of this paper is to test the screening role of loan contracts that consider collateral-interest margins simultaneously. Design/methodology/approach – This paper presents an empirical analysis that uses a unique data set composed of 323 bank loans granted by 28 banks to SMEs backed by a Spanish Mutual Guarantee Institution. Findings – The results show that appropriate combinations of collateral and interest rates can distinguish between borrowers with different project success probability: low success probability borrowers finance its projects without collateral and with high interest rates, whereas high success probability borrowers accept loans with real estate collateral and low interest rates. Practical implications – This screening mechanism reduces credit rationing, thus increasing good projects' access to credit. Originality/value – This study provides the first empirical evidence on the effectiveness of collateral-interest pairs as a self-selection mechanism.

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How Organizational Hierarchy Affects Information Production

Review of Financial Studies ◽

10.1093/rfs/hhy071 ◽

2018 ◽

Vol 32 (2) ◽

pp. 564-604 ◽

Cited By ~ 5

Author(s):

Janis Skrastins ◽

Vikrant Vig

Keyword(s):

Hierarchical Structures ◽

Credit Rationing ◽

Organizational Hierarchy ◽

Loan Contracts ◽

Bank Branches ◽

Oxford University ◽

Editorial Decision ◽

Reorganization Plan ◽

High Degree ◽

Published Paper

AbstractWe exploit a variation in organizational hierarchy induced by a reorganization plan implemented in roughly 2,000 bank branches in India. We do so to investigate how organizational hierarchy affects the allocation of credit. We find that increased hierarchization of a branch induces credit rationing, reduces loan performance, and generates standardization in loan contracts. Additionally, we find that hierarchical structures perform better in environments characterized by a high degree of corruption, highlighting the benefits of hierarchies in restraining rent-seeking activities. Overall, our results are consistent with the view that valuable information may be lost in hierarchical structures.Received May 4, 2018; editorial decision April 30, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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A Model for Screening Vulnerability in the Loan Market in the Context of Credit Rationing

International Journal of Strategic Decision Sciences ◽

10.4018/ijsds.2014010104 ◽

2014 ◽

Vol 5 (1) ◽

pp. 59-75 ◽

Cited By ~ 2

Author(s):

Saeed Asadi Bagloee ◽

Mohsen Asadi ◽

Cyrus Mohebbi

Keyword(s):

Empirical Data ◽

Credit Rationing ◽

Logit Models ◽

Subprime Mortgage ◽

Loan Contracts ◽

Explanatory Variables ◽

Loan Market ◽

Empirical Survey ◽

The Us ◽

Loan Terms

The loan market has contributed to the success and failure of economies. Examples of such failures are the US subprime mortgage crisis as well as the global economic meltdown that followed. Many factors influence the loan market, making it volatile and vulnerable. As such, it is important to understand the extent of its vulnerability. Such uncertainties emerge from asymmetric information in the loan market that may lead to credit rationing. Many studies have been devoted to exploring theoretical aspects of the credit market. However, before delving into the theory, it is important to understand and analyze empirical data. Having said that, the literature has yet to provide reliable methodologies for analyzing the empirical data of the loan market. Therefore, given an empirical survey, this study provides a model describing borrowers' behavior in the loan markets. Borrowers are faced with a variety of loan contracts with different terms and conditions from different banks. Logit models can be used to capture the borrowers' choice of bank. Credit is not easily available rather it is rationed and borrowers compete to obtain their required credit via best suited banks offers. The competition is guaranteed by developing a mathematical programming formulation (an objective function subject to constraints) integrated with the logit models for which a solution algorithm using Successive Coordinate Descent was developed. Numerical results of the methodology are presented. Loan terms and conditions as well the borrowers characteristics and preferences are captured in the logit models as explanatory variables. The methodology allows sensitivity analysis on the explanatory variables demonstrating the fluctuation and vulnerability of credit flow.

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Financial Folly and Spain’s Black Legend

10.23943/princeton/9780691151496.003.0010 ◽

2017 ◽

Author(s):

Mauricio Drelichman ◽

Hans-Joachim Voth

Keyword(s):

Seventeenth Century ◽

Economic History ◽

Military Power ◽

Great Flexibility ◽

Loan Contracts ◽

Historical Tradition ◽

Black Legend ◽

Contractual Obligations ◽

The Relationship

This epilogue argues that Castile was solvent throughout Philip II's reign. A complex web of contractual obligations designed to ensure repayment governed the relationship between the king and his bankers. The same contracts allowed great flexibility for both the Crown and bankers when liquidity was tight. The risk of potential defaults was not a surprise; their likelihood was priced into the loan contracts. As a consequence, virtually every banking family turned a profit over the long term, while the king benefited from their services to run the largest empire that had yet existed. The epilogue then looks at the economic history version of Spain's Black Legend. The economic history version of the Black Legend emerged from a combination of two narratives: a rich historical tradition analyzing the decline of Spain as an economic and military power from the seventeenth century onward, combined with new institutional analysis highlighting the unconstrained power of the monarch.

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Lending to the Borrower from Hell

10.23943/princeton/9780691151496.001.0001 ◽

2017 ◽

Cited By ~ 1

Author(s):

Mauricio Drelichman ◽

Hans-Joachim Voth

Keyword(s):

United States ◽

Sixteenth Century ◽

Sovereign Debt ◽

Risk Sharing ◽

The United States ◽

Philip Ii ◽

Loan Contracts ◽

The Right ◽

Intelligent Model ◽

New Evidence

Why do lenders time and again loan money to sovereign borrowers who promptly go bankrupt? When can this type of lending work? As the United States and many European nations struggle with mountains of debt, historical precedents can offer valuable insights. This book looks at one famous case—the debts and defaults of Philip II of Spain. Ruling over one of the largest and most powerful empires in history, King Philip defaulted four times. Yet he never lost access to capital markets and could borrow again within a year or two of each default. Exploring the shrewd reasoning of the lenders who continued to offer money, the book analyzes the lessons from this historical example. Using detailed new evidence collected from sixteenth-century archives, the book examines the incentives and returns of lenders. It provides powerful evidence that in the right situations, lenders not only survive despite defaults—they thrive. It also demonstrates that debt markets cope well, despite massive fluctuations in expenditure and revenue, when lending functions like insurance. The book unearths unique sixteenth-century loan contracts that offered highly effective risk sharing between the king and his lenders, with payment obligations reduced in bad times. A fascinating story of finance and empire, this book offers an intelligent model for keeping economies safe in times of sovereign debt crises and defaults.

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Delayed Repayment of Corporate Loans in the European Union: Can the Late Payment Directive be Applied to Loan Contracts?

International and Comparative Law Review ◽

10.2478/iclr-2018-0045 ◽

2018 ◽

Vol 18 (2) ◽

pp. 185-196

Author(s):

Magdalena Gruber

Keyword(s):

European Union ◽

Comprehensive Analysis ◽

The European Union ◽

Loan Contracts

Abstract This paper examines the Late Payment Directive of the European Union and seeks to answer the question of whether the provisions of the Directive apply to loan contracts in corporate transactions. The paper first describes and analyses the Late Payment Directive and provides a comprehensive analysis of relevant arguments and legal sources. It then evaluates the different factors required by the Late Payment Directive and finally argues that the Late Payment Directive has to be applied to loan contracts and facility agreements, even if this is not explicitly foreseen in the Directive.

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