Going-Concern Opinions and Bank Loan Contracting

Posted: 17 Nov 2013 Last revised: 13 Feb 2014

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Ning Ren

Rensselaer Polytechnic Institute; Long Island University Post

Yinghong Zhang

University of Central Oklahoma

Date Written: March 1, 2013

Abstract

We investigate the impact of going-concern opinions on price and non-price terms of bank loans. We argue that the existence of going-concern opinions increases both the default risk ex post and the information risk ex ante. Therefore, upon the issuance of these opinions, banks impose more stringent requirements on borrowers. Based on a sample of financially distressed companies during 2000–2010, we find that the existence of going-concern opinions gives rise to the denial rate of bank loans. In addition, the presence of these opinions increases the loan spreads and number of covenants, and decreases the loan maturity. Our findings suggest that going-concern opinions are useful to help bank managers to make loan decisions. Our findings are robust to several sensitivity tests including the fixed-effect regressions, the propensity score-matching method, the Heckman two-stage self-selection model, the firm-level regressions and the differences-in-difference approach.

Keywords: going-concern opinion; bank loan contracting; loan spreads; loan maturity; covenant

Suggested Citation

Francis, Bill and Hasan, Iftekhar and Ren, Ning and Ren, Ning and Zhang, Yinghong, Going-Concern Opinions and Bank Loan Contracting (March 1, 2013). Available at SSRN: https://ssrn.com/abstract=2354472

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Ning Ren

Rensselaer Polytechnic Institute ( email )

United States
5852819777 (Phone)

Long Island University Post ( email )

720 Northern Boulevard
Brookville, 11548-1327
United States
5162992095 (Phone)

Yinghong Zhang (Contact Author)

University of Central Oklahoma ( email )

100 North University Drive
Edmond, OK 73034
United States

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