The first author is from the Graduate School of Business, Fordham University and Bank of Finland. The second author is from the College of Business and Public Administration, Old Dominion University. The third author is from the Lally School of Management and Technology, Rensselaer Polytechnic Institute. They would like to thank Bill Francis, Ashok Robin, Norman C. Strong (associate editor), an anonymous referee, workshop participants at Rensselaer Polytechnic Institute, as well as participants at the 2009 American Accounting Association Annual Meeting for valuable feedback.
The Impact of Earnings Predictability on Bank Loan Contracting
Version of Record online: 5 JUL 2012
© 2012 Blackwell Publishing Ltd
Journal of Business Finance & Accounting
Volume 39, Issue 7-8, pages 1068–1101, September/October 2012
How to Cite
Hasan, I., Park, J. C. and Wu, Q. (2012), The Impact of Earnings Predictability on Bank Loan Contracting. Journal of Business Finance & Accounting, 39: 1068–1101. doi: 10.1111/j.1468-5957.2012.02292.x
- Issue online: 24 OCT 2012
- Version of Record online: 5 JUL 2012
- (Paper received November 2010, revised version accepted May 2012)
- earnings predictability;
- bank loans;
- cost of debt
Abstract: This study examines how earnings predictability affects bank loan contracting. Using a sample of 8,022 US bank loan contracts, we find that firms with more predictable earnings have more favorable loan terms, such as lower interest rates, longer maturities, and fewer covenants and collateral requirements. These results are robust to alternative specifications and earnings predictability measures. Additional analyses indicate that the relation between earnings predictability and bank loan cost varies with the availability of private information about borrowers, lenders’ monitoring incentives, the competition between banks and bond investors, and firm size. Overall, this study demonstrates that earnings predictability is an important determinant in the design of bank lending contracts affecting both price and nonprice loan terms.