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
Date Written: July 28, 2011
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
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