Information Opacity, Credit Risk, and the Design of Loan Contracts for Private Firms
34 Pages Posted: 29 May 2007 Last revised: 14 Apr 2011
Date Written: May 29, 2007
This paper examines the structure and cost of a large sample of bank loans to private firms. Compared to public firms, private firms are more informationally opaque and riskier. The results suggest that the design of a loan to a private firm is significantly different from that to a public firm. Bank loans to private firms are more likely to be by a sole lender, collateralized, and have sweep covenants than loans to public firms. The cost of borrowing is higher for a private firm than for a public firm, even after holding constant firm and loan characteristics.
Keywords: private firm financing, loan structure, loan pricing, bank financing, information opacity, credit risk, bank loans
JEL Classification: G20, G21
Suggested Citation: Suggested Citation