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Costs of Performance Pricing Loans

49 Pages Posted: 9 Nov 2011  

Yan Hu

University of La Verne

Connie X. Mao

Temple University - Fox School of Business and Management; Temple University - Department of Finance

Lalitha Naveen

Temple University

Date Written: October 11, 2011

Abstract

We examine how monitoring costs and costs of financial distress affect the use of performance pricing provisions in bank loan contracts. We find that firms that are easier to monitor, such as those with better accounting quality, lower information opacity, or a stronger prior relationship with the lender are more likely to have performance pricing loans. The likelihood of using performance pricing is significantly reduced after financial restatement events. Conditional on using performance pricing loans, firms with lower (higher) accounting quality are more likely to have credit rating (accounting) based performance pricing loans. Finally, we find that the use of performance pricing decreases in the likelihood of financial distress. Our results are robust to various alternative measures of accounting quality, information opacity, as well as default risk. Our results are consistent with the notion that the quality of accounting information has a significant influence on the design of financial contracts.

Keywords: Performance pricing, accounting quality, information opacity, default risk, debt contracting

JEL Classification: G21, G32

Suggested Citation

Hu, Yan and Mao, Connie X. and Naveen, Lalitha, Costs of Performance Pricing Loans (October 11, 2011). Available at SSRN: https://ssrn.com/abstract=1956580 or http://dx.doi.org/10.2139/ssrn.1956580

Yan Hu (Contact Author)

University of La Verne ( email )

1950 Third Street
La Verne, CA 91750
United States

Connie X. Mao

Temple University - Fox School of Business and Management ( email )

416 Alter Hall
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-4895 (Phone)
215-204-1697 (Fax)

Lalitha Naveen

Temple University ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-6435 (Phone)

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