The Impact of Earnings Predictability on Bank Loan Contracting

Iftekhar Hasan, Jong Chool Park, Qiang Wu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

33 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1068-1101
Number of pages34
JournalJournal of Business Finance and Accounting
Volume39
Issue number7-8
DOIs
Publication statusPublished - Sep 2012
Externally publishedYes

Keywords

  • Bank loans
  • Cost of debt
  • Earnings predictability

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting (miscellaneous)
  • Finance

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