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Performance-sensitive debt: The intertwined effects of performance measurement and pricing grid asymmetry

Listed author(s):
  • Bannier, Christina E.
  • Wiemann, Markus

This paper studies the use of performance pricing (PP) provisions in debt contracts and compares accounting-based with rating-based pricing designs. We find that rating-based provisions are used by volatile-growth borrowers and allow for stronger spread increases over the credit period. Accounting-based provisions are employed by opaque-growth borrowers and stipulate stronger spread reductions. Further, a higher spread-increase potential in rating-based contracts lowers the spread at the loan's inception and improves the borrower's performance later on. In contrast, a higher spread-decrease potential in accounting-based contracts lowers the initial spread and raises the borrower's leverage afterwards. The evidence indicates that rating-based contracts are indeed employed for different reasons than accounting-based contracts: the former to signal a borrower's quality, the latter to mitigate investment inefficiencies.

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File URL: https://www.econstor.eu/bitstream/10419/102699/1/798214589.pdf
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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 476.

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Date of creation: 2014
Handle: RePEc:zbw:cfswop:476
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  15. Koziol, Christian & Lawrenz, Jochen, 2010. "Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information," Journal of Corporate Finance, Elsevier, vol. 16(2), pages 182-204, April.
  16. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
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  19. Adam, Tim R. & Streitz, Daniel, 2014. "Hold-Up and the Use of Performance-Sensitive Debt," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 476, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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