Information Opacity, Credit Risk, and the Design of Loan Contracts for Private Firms

34 Pages Posted: 29 May 2007 Last revised: 14 Apr 2011

See all articles by Lucy F. Ackert

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business

Rongbing Huang

Kennesaw State University - Michael J. Coles College of Business

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

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Date Written: May 29, 2007

Abstract

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

Ackert, Lucy F. and Huang, Rongbing and Ramirez, Gabriel G., Information Opacity, Credit Risk, and the Design of Loan Contracts for Private Firms (May 29, 2007). Financial Markets, Institutions and Instruments, 2007 . Available at SSRN: https://ssrn.com/abstract=989357

Lucy F. Ackert

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Department of Economics and Finance
Kennesaw, GA 30144
United States
770-423-6111 (Phone)
770-499-3209 (Fax)

Rongbing Huang (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

560 Parliament Garden Way
Mail Drop #0403
Kennesaw, GA 30144
United States

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6181 (Phone)

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