The Impact of Earnings Predictability on Bank Loan Contracting

Hasan, Iftekhar; Park, Jong Chool; Wu, Qiang

doi:10.2139/ssrn.1898197

The Impact of Earnings Predictability on Bank Loan Contracting

Journal of Business Finance and Accounting, Forthcoming

51 Pages Posted: 10 Dec 2011 Last revised: 22 Feb 2013

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Jong Chool Park

University of South Florida - School of Accountancy

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

There are 2 versions of this paper

Date Written: July 28, 2011

Abstract

This study examines how earnings predictability affects bank loan contracting. Using a sample of 8,626 bank loan contracts, we find that firms with more predictable earnings have more favorable loan terms, such as lower interest rates, longer maturities, and fewer covenants and collateral requirements. These results are robust to alternative specifications and earnings predictability measures. Additional analyses indicate that the relation between earnings predictability and bank loan cost varies with the availability of private information about borrowers, lenders’ monitoring incentives, the competition between banks and bond investors, and firm size. Overall, this study demonstrates that earnings predictability is an important determinant in the design of bank lending contracts affecting both price and nonprice loan terms.

Keywords: earnings predictability, bank loans

Suggested Citation: Suggested Citation

Hasan, Iftekhar and Park, Jong Chool and Wu, Qiang, The Impact of Earnings Predictability on Bank Loan Contracting (July 28, 2011). Journal of Business Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1898197 or http://dx.doi.org/10.2139/ssrn.1898197