Does Bank Monitoring Influence Loan Contract Terms?

Abstract

This paper examines the impact of bank monitoring on loan pricing and maturity using new proxies for monitoring ability based on the labor input into the monitoring process as well as traditional output-based measures of monitoring. We show, in out-of-sample tests, that an input-based monitoring proxy and the output proxies are significant determinants of future loan quality. Controlling for borrower characteristics and other loan contract features, we find strong evidence that the input-based monitoring measure is a significant determinant of loan pricing and maturity. However, traditional output-based measures of monitoring ability are significant in determining loan maturity, but not loan pricing.

Keywords: Bank monitoring, loan pricing, loan maturity

JEL Classification: G21