Reputation and Loan Contract Terms: The Role of Principal Customers

Review of Finance, Forthcoming

54 Pages Posted: 27 Mar 2014 Last revised: 10 May 2015

See all articles by Ling Cen

Ling Cen

The Chinese University of Hong Kong

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Redouane Elkamhi

University of Toronto - Rotman School of Management

Raunaq S. Pungaliya

Sungkyunkwan University (SKK) Graduate School of Business

Date Written: May 10, 2015

Abstract

Principal customers have strong incentives to screen and/or monitor suppliers to ensure supply-chain stability; consequently, the implicit certification from the existence of long-term relationships with principal customers has reputational consequences that potentially spill over to other markets. We argue that one such consequence is smaller loan spreads and looser loan covenants on bank loans, as firms that are able to hold on to principal customers longer are perceived as safer firms by banks. We address causality and endogeneity issues via a variety of tests and find consistent results. Our study suggests that non-financial stakeholders can have important effects on the decisions of financial stakeholders.

Keywords: Principal customers, loan contracts, reputation-building, cross-monitoring

JEL Classification: G30, G21

Suggested Citation

Cen, Ling and Dasgupta, Sudipto and Elkamhi, Redouane and Pungaliya, Raunaq S., Reputation and Loan Contract Terms: The Role of Principal Customers (May 10, 2015). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2415468 or http://dx.doi.org/10.2139/ssrn.2415468

Ling Cen

The Chinese University of Hong Kong ( email )

CYT Building
Sha Tin
Hong Kong, Hong Kong
Hong Kong

HOME PAGE: http://https://sites.google.com/site/cenling/

Sudipto Dasgupta (Contact Author)

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Raunaq S. Pungaliya

Sungkyunkwan University (SKK) Graduate School of Business ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

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