Are All Types of Real Transaction Management Equal in the Eyes of Bank Lenders?

50 Pages Posted: 12 Sep 2018

See all articles by Po-Chang Chen

Po-Chang Chen

Miami University of Ohio - Richard T. Farmer School of Business Administration

William J. Moser

Miami University

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation

Date Written: August 15, 2018

Abstract

This study examines whether bank lenders have different reactions to various types of real transaction management (RTM) by borrowing firms. Drawing upon Jensen and Meckling’s asset substitution theory (1976) as well as banks’ unique payoff functions and monitoring incentives, we predict and find that banks offer more favorable loan terms (i.e., lower interest spreads, reduced probability for required collateral, reduced number and strictness of financial covenants) for firms displaying higher levels of RTM through reductions in R&D expenditures. In contrast, banks offer less favorable loan terms for firms displaying higher levels of RTM through aggressive price discounts, overproduction of inventories, and abnormal reduction of SG&A expenses. Additional analysis reveals that the favorable effect on loan pricing for R&D outlay reductions is smaller for longer-maturity loans. Overall, our study suggests that banks do not negatively view all forms of RTM.

Keywords: real transaction management; loan contracting; cost of debt; debt covenants; probability of debt covenant violation

JEL Classification: G14, M41, M43

Suggested Citation

Chen, Po-Chang and Moser, William J. and Narayanamoorthy, Ganapathi S., Are All Types of Real Transaction Management Equal in the Eyes of Bank Lenders? (August 15, 2018). Available at SSRN: https://ssrn.com/abstract=3233089 or http://dx.doi.org/10.2139/ssrn.3233089

Po-Chang Chen (Contact Author)

Miami University of Ohio - Richard T. Farmer School of Business Administration ( email )

3086 Farmer School of Business
Oxford, OH 45056
United States

William J. Moser

Miami University ( email )

2027 Farmer School of Business
800 East High Street
Oxford, OH 45056
United States
513-529-8284 (Phone)

Ganapathi S. Narayanamoorthy

Tulane University - Accounting & Taxation ( email )

United States

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