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The Determinants of Contract Terms in Bank Revolving 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 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.

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 State University, Muncie, IN47306; Nandy and Sharpe, School of Banking and Finance, University of New South Wales, Sydney, NSW 2052 Australia. An earlier version of this paper was presented at the Australian Graduate School of Business, Monash University at Clayton, University of Technology-Sydney, The University of New England, The University of Western Australia, the 1998 AAANZ Conference, the 1998 FMA Meetings in Chincago, and the Banking Research Study Group at the University of New South Wales. The authors would like to thank participants at these presentations and Neil Esho, Mark Flannery, Benton Gup, Warren Hogan, paul Kofman, Kerry Pattenden, Jian-Xin Wang, Jonathan Karpoff (the editor), and Elazar Berkovitch (the referee) for their helpful comments. The financial support of the Australain Research Council is also recognized.

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