Complexity, Standardization, and the Design of Loan Agreements

73 Pages Posted: 15 Apr 2017 Last revised: 28 Apr 2017

See all articles by Bernhard Ganglmair

Bernhard Ganglmair

ZEW – Leibniz Centre for European Economic Research - Junior Research Group Competition and Innovation; University of Mannheim - Department of Economics; Mannheim Centre for Competition and Innovation (MaCCI)

Malcolm Wardlaw

University of Georgia

Date Written: April 13, 2017

Abstract

This paper uses a text-based approach to analyze the level of detail and customization found in the defaults and covenants sections of a large sample of private loan contracts. While previous studies have examined a small number of well-defined accounting covenants, we characterize a significant amount of detail not captured by these covenants. We demonstrate that while complexity and detail are an important aspect of complete contracts, tradeoffs exist in which excess detail is incorporated at the expense of less customization. Contracts are more detailed when firms are closer to the default boundary, maturities are longer, loan amounts are larger, lenders are distant from the firm, loans are widely syndicated, and the existing financial structure is more complex. Alternatively, we find that loans are less customized and more “boilerplate” when they are widely syndicated and lenders are more distant. We also find that loans with more detailed clauses are renegotiated more often, while more customized ones are renegotiated less, suggesting that boilerplate language may serve as a reference point for future renegotiation.

Keywords: Boilerplate Contracting, Contract Completeness, Contract Complexity, Incomplete Contracts, Loan Contracts, Natural Language Processing, Text Analysis, Transaction Costs Economics

JEL Classification: D86, K12, G30, G32, G21

Suggested Citation

Ganglmair, Bernhard and Wardlaw, Malcolm, Complexity, Standardization, and the Design of Loan Agreements (April 13, 2017). Available at SSRN: https://ssrn.com/abstract=2952567 or http://dx.doi.org/10.2139/ssrn.2952567

Bernhard Ganglmair

ZEW – Leibniz Centre for European Economic Research - Junior Research Group Competition and Innovation ( email )

L7,1
Mannheim, 68161
Germany

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Mannheim Centre for Competition and Innovation (MaCCI) ( email )

L 7, 1
Mannheim, 68131
Germany

Malcolm Wardlaw (Contact Author)

University of Georgia ( email )

Athens, GA 30602-6254
United States

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