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The Determinants of Contract Terms in Bank Revolving Credit Agreements

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Author Info
Dennis, Steven
Nandy, Debarshi
Sharpe, Lan G.

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Abstract

The paper examines the determinats of contract terms on bank revolving credit agreements (revolvers) of medium/large publicly traded companies. We model the duration (maturity), secured status, and pricing decisions within a simultaneous decision framework, thereby overcoming the biased and inconsistent estimates in prior single equations studies of debt contract terms. We find strong interrelationaships between contract terms with significant bi-directorinal relationships between duration and secure status and between the all-in-spread and commitment fees and aunidirectional relationship from both duration and secured status to all-in-spread. We also illustrate how several single equation studies of contract terms draw incorrect conclusions because of their (inappropriate) assumption that other contract therms and leverage were exogenous. Finally, our results support the hypothesis that the setting of contract terms plays and important role in alleviating contracting problems.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 35 (2000)
Issue (Month): 01 (March)
Pages: 87-110
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:cup:jfinqa:v:35:y:2000:i:01:p:87-110_00

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