Product Market Threats and Performance-Sensitive Debt

50 Pages Posted: 19 Mar 2014 Last revised: 5 Oct 2018

See all articles by Einar C. Kjenstad

Einar C. Kjenstad

Aarhus University

Xunhua Su

Norwegian School of Economics (NHH)

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: September 16, 2018

Abstract

This paper examines how product market threats shape the use of performance pricing in loan contracts. Loan contracting faces a trade-off between financial markets and product markets: while using contractual terms that are linked to borrower performance -- such as performance pricing -- mitigates borrower-creditor frictions in financial markets, it makes a borrower vulnerable to product market pressures, which often decline borrower performance and make performance pricing more likely to become binding. Supporting this trade-off, we find that product market threats significantly moderate the use of performance pricing in loan contracts, particularly when the benefit of doing so outweighs its cost in exacerbating borrower-creditor frictions in financial markets

Keywords: product market threats, financial markets, loan contracting, performance-sensitive debt, performance pricing

JEL Classification: G20, G21, G30, G32, L10, L20

Suggested Citation

Kjenstad, Einar C. and Su, Xunhua and Xia, Han, Product Market Threats and Performance-Sensitive Debt (September 16, 2018). Available at SSRN: https://ssrn.com/abstract=2410568 or http://dx.doi.org/10.2139/ssrn.2410568

Einar C. Kjenstad

Aarhus University ( email )

Nordre Ringgade 1
Aarhus, 8000
Denmark

Xunhua Su (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/xunhuasu/research

Han Xia

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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