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The Determinants of Contract Terms in BankRevolving Credit Agreements

Published online by Cambridge University Press:  06 April 2009

Steven Dennis ,
Debarshi Nandy  and
Lan G. Sharpe
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Abstract

The paper examines the determinats of contract terms onbank revolving credit agreements (revolvers) ofmedium/large publicly traded companies. We model theduration (maturity), secured status, and pricingdecisions within a simultaneous decision framework,thereby overcoming the biased and inconsistentestimates in prior single equations studies of debtcontract terms. We find strong interrelationashipsbetween contract terms with significantbi-directorinal relationships between duration andsecure status and between the all-in-spread andcommitment fees and aunidirectional relationshipfrom both duration and secured status toall-in-spread. We also illustrate how several singleequation studies of contract terms draw incorrectconclusions because of their (inappropriate)assumption that other contract therms and leveragewere exogenous. Finally, our results support thehypothesis that the setting of contract terms playsand important role in alleviating contractingproblems.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 35 , Issue 1 , March 2000 , pp. 87 - 110
Copyright
Copyright © School of Business Administration, University of Washington 2000

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Footnotes

*

Dennis, College of Business, Baull StateUniversity, Muncie, IN47306; Nandy and Sharpe,School of Banking and Finance, University of NewSouth Wales, Sydney, NSW 2052 Australia. Anearlier version of this paper was presented at theAustralian Graduate School of Business, MonashUniversity at Clayton, University ofTechnology-Sydney, The University of New England,The University of Western Australia, the 1998AAANZ Conference, the 1998 FMA Meetings inChincago, and the Banking Research Study Group atthe University of New South Wales. The authorswould like to thank participants at thesepresentations and Neil Esho, Mark Flannery, BentonGup, Warren Hogan, paul Kofman, Kerry Pattenden,Jian-Xin Wang, Jonathan Karpoff (the editor), andElazar Berkovitch (the referee) for their helpfulcomments. The financial support of the AustralainResearch Council is also recognized.

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