Going-Concern Opinions and Bank Loan Contracting

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