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

Authors


Lucy F. Ackert, Department of Economics and Finance, Coles College of Business, Kennesaw State University, 1000 Chastain Road, Kennesaw, GA 30144. Tel: +(770)423-6111; Fax: +(770)499-3209; E-mail: lackert@kennesaw.edu

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.

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