Debt Structure

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Sheraton Grand Chicago, Sheraton Ballroom III
Hosted By: American Finance Association
  • Chair: Justin Murfin, Yale University

Credit Supply and Contracting on Hard Information in Debt Markets

Aytekin Ertan
,
London Business School
Stephen Karolyi
,
Carnegie Mellon University

Abstract

We use fair value adoption as a quasi-natural experiment to examine the effect of hard information on credit supply through a contracting channel. After fair value adoption, usage of financial covenants depending on capital-based fair value treatments significantly declined. Capital-based covenant usage by treated borrowers in the financial sector dropped by 7.7 percentage points relative to control borrowers. They also experienced an 8.2% relative drop in credit supply, suggesting that the debt contracting space shrunk. Affected borrowers did not compensate with alternative funding sources; they decreased their own lending by 2.8%, propagating these contracting effects to the real economy.

Still Learning After All These Years: Dynamic Information Acquisition in Banking

Matthew Botsch
,
Bowdoin College
Victoria Vanasco
,
Stanford University

Abstract

This paper explores the implications of asymmetric information and learning in banking. We hypothesize that banks acquire private information about borrower quality when establishing firm-bank relationships. We develop a general methodology to test this hypothesis, and apply this using a dataset for 7,707 syndicated loans made between 1987 and 2003. Our tests require the construction of a variable from the future that is correlated with firm quality and is unobservable by the bank, so it cannot be used directly to price loans. We find that the loading on this proxy in the bank's pricing equation increases with relationship time, as we would expect if banks were privately learning about firm fundamentals through their relationships with firms. The results are robust to controlling for public, i.e. market-wide, learning. Our findings are the strongest evidence to date that banks acquire valuable private information about borrowers via lending relationships. We find that private bank learning about firm quality particularly benefits higher-quality borrowers, who receive lower interest rates on subsequent loans.

Bank Monitoring: Evidence From Syndicated Loans

Matthew Gustafson
,
Pennsylvania State University
Ivan Ivanov
,
Federal Reserve Board
Ralf Meisenzahl
,
Federal Reserve Board

Abstract

The rise in popularity of syndicated lending raises questions regarding the incentive for banks to actively monitor borrowers. We empirically investigate this question using a novel dataset that includes the frequency with which banks monitor syndicated bank loans to U.S. borrowers. We find that banks monitor syndicated loans often with 50\% of loans being monitored at least on a monthly frequency. Monitoring frequency is increasing in the lead arranger’s loan share for private borrowers and the lead bank’s reputation for public borrowers. This is consistent with lender reputation sufficiently mitigating moral hazard only to the extent that monitoring effort is verifiable. Lead banks also monitor more when monitoring is likely to produce new information and when information is more valuable, such as when borrower financial health deteriorates. Overall, our results suggest that banks actively monitor the average syndicated loan in a manner consistent with theoretical predictions in the literature.
Discussant(s)
Jose Liberti
,
Northwestern University and DePaul University
Mitchell Petersen
,
Northwestern University
Taylor Begley
,
London Business School
JEL Classifications
  • G3 - Corporate Finance and Governance