Changes in Spreads Based on the Adoption of Performance Pricing

30 Pages Posted: 17 Apr 2014

See all articles by J. Souza

J. Souza

University of Memphis - School of Accountancy

Frances Fabian

University of Memphis

Date Written: December 31, 2013

Abstract

We investigate the dynamics of interest loan spreads for performance sensitive debt (PSD) over time, related to both fixed loans and spreads for different categories of borrowers. Early studies identified lower spreads for PSD versus other fixed rate loans. Theories for the relative PSD rates include the transfer of credit risk from lender to borrower, lower contracting costs, macroeconomic conditions, and competitive pricing to gain PSD borrowers. Previous research has not examined the distribution of PSD benefits, thus their role in either ameliorating or exacerbating the uneven access to credit in the economy is unknown. Our findings indicate that large firms have accrued most of the benefits of this loan innovation, even after controlling for variables associated with creditworthiness.

Keywords: Performance pricing, performance sensitive debt, credit risk, technological change, early adoption

JEL Classification: D86, G21, M14, O31, O33

Suggested Citation

Souza, J. and Fabian, Frances, Changes in Spreads Based on the Adoption of Performance Pricing (December 31, 2013). Available at SSRN: https://ssrn.com/abstract=2425229 or http://dx.doi.org/10.2139/ssrn.2425229

J. Souza (Contact Author)

University of Memphis - School of Accountancy ( email )

Fogelman College of Business and Economics
Memphis, TN 38152-6460
United States
901.678.4576 (Phone)

Frances Fabian

University of Memphis ( email )

Memphis, TN 38152
United States
901.678.2851 (Phone)

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