an independent thesis submitted in fulfillment of the requirements for the degree of doctor of philosophy

Jointness of Loan Contract Terms, Information Asymmetries, and Lending Relationships Pham Phu Quoc BEcon (Banking) – Banking University of Ho Chi Minh City, Vietnam MA (Economics) – University of Colombo, Sri Lanka An independent thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy Department of Accounting and Finance Faculty of Business and Economics Monash University November 2012 TABLE OF CONTENTS TABLE OF CONTENTS LIST OF TABLES ABBREVIATIONS ABSTRACT STATEMENT OF AUTHORSHIP ACKNOWLEDGEMENTS CHAPTER - INTRODUCTION 1.1 INTRODUCTION 1.2 BACKGROUND 1.2.1 Information Asymmetries 1.2.2 Lending Process 1.2.3 Loan Contract Terms 1.2.4 Borrower Information and Lending Relationships 1.3 MOTIVATIONS AND RESEARCH QUESTIONS 1.3.1 Jointness of Loan Contract Terms 1.3.2 Information Asymmetries and Loan Contract Terms 1.3.3 Lending Relationships and Loan Contract Terms 1.4 RESEARCH OBJECTIVES AND HYPOTHESES 1.5 DATA, METHODOLOGY, AND EMPIRICAL FINDINGS 1.5.1 Data 1.5.2 Methodology 1.5.3 Empirical Findings 1.6 CONTRIBUTIONS 1.7 IMPLICATIONS 1.8 STRUCTURE OF THE THESIS CHAPTER - LITERATURE REVIEW 2.1 INTRODUCTION 2.2 THEORY AND EVIDENCE ON LOAN TERM RELATIONS 2.2.1 Relations between Loan Contract Terms 2.2.2 Jointness of Loan Contract Terms (Hypotheses for RQ1) 2.3 INFORMATION ASYMMETRIES AND CONTRACT TERMS 2.3.1 Information Asymmetries and Loan Terms 2.3.2 Loan Term Trade-Offs and Information Asymmetries 2.3.2.1 Loan Size Selection, Given Loan Term Jointness 2.3.2.2 Covenant Choice, Given Loan Term Jointness 2.3.2.3 Loan Price, Collateral, and Maturity Choice, Given Loan Term Jointness 2.3.2.4 Hypotheses for RQ2 2.4 LENDING RELATIONSHIPS AND LOAN TERMS 2.4.1 Lending Relationship Concepts 3.4.1.1 Lending Relationships ii ii vi viii ix xii xiii 1 2 4 5 11 15 15 16 17 20 22 24 25 25 25 25 33 36 36 39 39 42 43 43 45 45 45 3.4.1.2 Lending Relationship Measures Literature on Lending Relationships and Loan Terms Hypotheses for RQ3 2.4.3.1 Impact of Lending Relationships on Loan Covenants 2.4.3.2 Impact of Lending Relationships on Loan Size 2.4.4 Hypotheses for RQ4 2.5 CHAPTER SUMMARY CHAPTER - DATA AND METHODOLOGY 3.1 INTRODUCTION 3.2 DATA AND SAMPLE 3.2.1 Data Sources 3.2.2 Database Characteristics 3.2.2.1 DealScan’s Information Sources 3.2.2.2 DealScan’s Deal and Facility Classifications 3.2.2.3 Searching DealScan Borrower Information from Compustat 3.2.2.4 Reporting Year Inconsistencies between DealScan and Compustat 3.2.2.5 Potential Misidentification of Lender and Borrower Names 3.2.3 Revolving and Term Loans 3.2.4 Sample Units, Sampling Procedures, and Composition 3.3 METHODOLOGY FOR RQ1, RQ2, AND RQ3 3.3.1 Model Specification 3.3.2 Estimation Methods 3.4 METHODOLOGY FOR RQ4 3.4.1 Model Specification 3.4.2 Estimation Methods 3.5 ROBUSTNESS TESTS 3.5.1 Different Proxies for Information Asymmetries 3.5.2 Alternative Measures of Lending Relationship 3.5.3 Endogeneity of Loan Type Selection 3.6 CHAPTER SUMMARY CHAPTER - VARIABLES AND DESCRIPTIVE STATISTICS 4.1 INTRODUCTION 4.2 VARIABLES 4.2.1 Loan Contract Terms 4.2.1.1 Loan Price 4.2.1.2 Collateral 4.2.1.3 Maturity 4.2.1.4 Covenants 4.2.1.5 Loan Size 4.2.1.6 Other Loan Characteristics 4.2.2 Lender Characteristics 4.2.3 Borrower Characteristics 2.4.2 2.4.3 iii 46 47 52 53 54 55 57 60 60 60 60 62 62 62 63 64 65 66 68 71 72 75 82 82 83 85 85 85 86 90 92 92 92 92 93 93 95 95 98 99 101 102 4.2.3.1 Information Asymmetries 4.2.3.2 Lending Relationships 4.2.3.3 Other Borrower Characteristics 4.2.4 Macroeconomic Factors 4.3 DESCRIPTIVE STATISTICS AND CORRELATION ANALYSIS 4.3.1 Descriptive Statistics 4.3.2 Correlation Analysis 4.4 CHAPTER SUMMARY CHAPTER - EMPIRICAL RESULTS 5.1 INTRODUCTION 5.2 EMPIRICAL RESULTS FOR RQ1 5.2.1 Results for H1.1 5.2.2 Results for H1.2 and H1.3 5.2.3 Summary of Hypothesis Testing for RQ1 5.3 EMPIRICAL RESULTS FOR RQ2 5.3.1 Results for H2.1 5.3.2 Results for H2.2 5.3.3 Results for H2.3 5.3.4 Results for H2.4 5.3.5 Results for H2.5 5.3.6 Summary of Hypothesis Testing for RQ2 5.4 EMPIRICAL RESULTS FOR RQ3 5.4.1 Results for H3.1 5.4.2 Results for H3.2 5.4.3 Summary of Hypothesis Testing for RQ3 5.5 EMPIRICAL RESULTS FOR RQ4 5.5.1 Results for H4.1 5.5.2 Results for H4.2 5.5.3 Results for H4.3 5.5.4 Results for H4.4 5.5.5 Summary of Hypothesis Testing for RQ4 5.6 RESULTS FOR CONTROL VARIABLES AND ROBUSTNESS TESTS 5.6.1 Results for Control Variables 5.6.2 Robustness Tests of the Hypotheses for RQ1, RQ2, RQ3, and RQ4 5.6.2.1 Other Information Asymmetry Proxies 5.6.2.2 Alternative Lending Relationship Measures 5.6.2.3 Endogeneity of Loan Type Selection 5.7 CHAPTER SUMMARY CHAPTER - CONCLUSION 6.1 INTRODUCTION 6.2 REVIEW OF RESEARCH QUESTIONS, HYPOTHESES, AND FINDINGS 6.2.1 RQ1: Are loan contract terms (i.e., price, collateral, maturity, covenants, and size) simultaneously determined? 6.2.2 RQ2: Given their jointness, are loan terms (i.e., price, collateral, iv 102 106 109 116 122 122 128 129 130 130 130 131 133 142 144 145 146 146 147 148 149 151 152 152 153 154 157 158 158 159 159 161 162 162 162 163 163 164 166 166 166 168 170 maturity, covenants, and size) traded off when addressing borrower information asymmetries? 6.2.3 RQ3: Given the jointness of loan terms, lending relationships affect loan covenants and size? 6.2.4 RQ4: Given the jointness of loan terms, borrowers with higher information asymmetries benefit from better price and non-price terms from their relationship lenders? 6.3 CONTRIBUTIONS 6.4 IMPLICATIONS 6.5 LIMITATIONS 6.6 FUTURE RESEARCH DIRECTIONS REFERENCES APPENDIX A - SELECTED LOAN DATA CHARACTERISTICS APPENDIX B - EXPECTED SIGNS OF VARIABLES APPENDIX C - CORRELATION MATRIX FOR REVOLVING AND TERM LOANS APPENDIX D - FIRST STAGE REGRESSION FOR THE RQ1, RQ2, AND RQ3 MODEL APPENDIX E - FURTHER ANALYSIS ON THE RQ1, RQ2, AND RQ3 MODEL E.1 MULTICOLLINEARITY DETECTION E.2 LOAN TERM RELATIONS E.3 LENDING RELATIONSHIP IMPACT ON LOAN TERMS E.4 RESULTS OF CONTROL VARIABLES APPENDIX F - ROBUSTNESS TESTS FOR RQ1, RQ2, AND RQ3 F.1 DIFFERENT PROXIES FOR INFORMATION ASYMMETRIES F.2 ALTERNATIVE MEASURES OF LENDING RELATIONSHIPS F.3 ENDOGENEITY OF LOAN TYPE SELECTION APPENDIX G - DETAIL ESTIMATES RELATED TO THE RQ4 MODEL APPENDIX H - ROBUSTNESS TESTS FOR RQ4 H.1 DIFFERENT PROXIES FOR INFORMATION ASYMMETRIES H.2 ALTERNATIVE MEASURES OF LENDING RELATIONSHIPS H.3 ENDOGENEITY OF LOAN TYPE SELECTION v 171 172 173 177 179 181 184 218 224 226 234 238 238 242 245 247 250 250 267 288 294 298 298 315 336 LIST OF TABLES Table 1.1 Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 4.1 Table 4.2 Table 4.3 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7 Table 6.1 Table A1 Table A2 Table A3 Table A4 Table B1 Table C1 Table D1 Table E1 Table F1 Prior studies on loan term jointness Relations between the pairs of loan terms Summary of the effects of information asymmetry on individual loan terms Summary of information asymmetry effects on loan terms, given their jointness Summary of prior studies on the impact of the lending relationship on loan terms Summary of the four research questions and their hypotheses Summary of data sources An example of the contract terms of different facilities in a deal Sample selection process Testing procedures for the hypotheses associated with RQ1, RQ2, and RQ3 Testing procedure for the hypotheses associated with RQ4 Financial and general covenants List of variables and their definitions and data sources Descriptive statistics and difference test results for revolving and term loans DWH statistics for exogeneity tests Second-stage regression results Summary of test results for the hypotheses related to RQ1 Summary of test results for the hypotheses related to RQ2 Summary of test results for the hypotheses related to RQ3 Summary of the interaction impacts of information asymmetries and lending relationship on loan terms Summary of test results for the hypotheses related to RQ4 Research questions, related hypotheses and results Distributions of loan types and loan distribution methods from 1987 to 2009 Distribution of loan covenants from 1987 to 2009 Differences between loans with and without collateral information Comparison of loan terms and firm characteristics in initial and final samples Expected signs of variables used in Equations 3.11 – 3.15 Correlation matrix for revolving and term loans First stage regression for the model related to RQ1, RQ2, and RQ3 VIF values for independent variables in Equations 3.11 – 3.15 Second stage regression results for RQ1, RQ2, and RQ3 with information asymmetries proxied by LN(FIRMAGE) vi 27 37 39 48 59 61 63 70 80 84 96 118 123 132 135 143 150 153 156 160 167 219 220 221 222 224 226 235 239 251 Table F2 Table F3 Table F4 Table F5 Table F6 Table F7 Table F8 Table F9 Table F10 Table F11 Table G1 Table H1 Table H2 Table H3 Table H4 Table H5 Table H6 Table H7 Table H8 Table H9 Table H10 Second stage regression results for RQ1, RQ2, and RQ3 with information asymmetries proxied by R&D Second stage regression results for RQ1, RQ2, and RQ3 with information asymmetries proxied by FCSTERROR Second stage regression results for RQ1, RQ2, and RQ3 with information asymmetries proxied by DISPERSION Second stage regression results for RQ1, RQ2, and RQ3 with lending relationships measured by REL(A) Second stage regression results for RQ1, RQ2, and RQ3 with lending relationships measured by REL(N) Second stage regression results for RQ1, RQ2, and RQ3 with lending relationships measured by REL(D)_3YEAR Second stage regression results for RQ1, RQ2, and RQ3 with lending relationships measured by REL(A)_3YEAR Second stage regression results for RQ1, RQ2, and RQ3 with lending relationships measured by REL(N)_3YEAR Logit estimation of revolving loan selection (Equation 3.16) Second stage regression results for RQ1, RQ2, and RQ3 after controlling for the endogeneity of loan type selection Results for interaction impacts of information asymmetries and lending relationship on loan terms Second stage regression results for RQ4 with information asymmetries proxied by LN(FIRMAGE) Second stage regression results for RQ4 with information asymmetries proxied by R&D Second stage regression results for RQ4 with information asymmetries proxied by FCSTERROR Second stage regression results for RQ4 with information asymmetries proxied by DISPERSION Second stage regression results for RQ4 with lending relationships measured by REL(A) Second stage regression results for RQ4 with lending relationships measured by REL(N) Second stage regression results for RQ4 with lending relationships measured by REL(D)_3YEAR Second stage regression results for RQ4 with lending relationships measured by REL(A)_3YEAR Second stage regression results for RQ4 with lending relationships measured by REL(N)_3YEAR Second stage regression results for RQ4 after controlling for the endogeneity of loan type selection vii 255 259 263 268 272 276 280 284 289 290 294 299 303 307 211 316 320 324 328 332 337 ABBREVIATIONS 2S CPI CRSP DWH EBITDA ENSR FFIEC GVKEY H IA I/B/E/S LIBOR LPC IPO LBO MBO NIC NSSBF OLS REL RQ RSSD ID SEC SFE SIC SSBF U.K U.S VIF WRDS Two-Stage Consumer Price Index Center for Research in Security Prices Durbin–Wu–Hausman Earnings Before Interest, Taxes, Depreciation and Amortization European Network for SME Research Federal Financial Institutions Examination Council Global Company Key Hypothesis Information Asymmetries Institutional Brokers' Estimate System London Interbank Offered Rate Loan Pricing Corporation Initial Public Offering Leveraged Buyout Management Buy-out National Information Center National Survey of Small Business Finances Ordinary least squares Lending Relationship Research Question Replication Server System Database Identification Securities and Exchange Commission Survey of the Financial Environment Standard Industrial Classification Survey of Small Business Finances The United Kingdom The United States of America Variance Inflation Factor Wharton Research Data Services viii ABSTRACT This thesis shows that five key loan contract terms – price, collateral, maturity, covenants, and size – are jointly determined and investigates how lenders and borrowers trade these off to address information asymmetries It further examines whether prior lending relationships affect loan covenants and size and whether borrowers with higher information asymmetries obtain better loan terms from their relationship lenders Since revolving and term loans differ in their characteristics, these issues are examined for the two loan types separately The sample consists of 17,636 revolving and 6,625 term loans made by banks operating in the United States to U.S non-financial firms from January 1994 to 31 December 2009 A system of five simultaneous equations is used to examine loan term jointness It also provides coefficients for an information asymmetry proxy and a lending relationship measure to examine how loan terms are used to address information asymmetries as well as whether prior lending relationships impact loan covenants and size This model is modified by adding a product of the information asymmetry and lending relationship measures and then used to investigate if borrowers with higher information asymmetries obtain better terms from their relationship lenders The empirical results show all five key loan terms are jointly determined For revolving loans, high information asymmetry borrowers pay higher prices, are more likely to be required to provide collateral, and accept shorter maturities in return for obtaining larger loans with fewer covenants For term loans, such borrowers pay higher prices and are more likely to pledge collateral in return for larger loans Those ix borrowers with prior lending relationships accept more covenants but obtain larger loans for both two loan types Borrowers with higher information asymmetries, however, obtain neither lower prices nor more favourable non-price terms from their relationship lenders This thesis makes several academic contributions It extends other studies (e.g., Dennis, Nandy, and Sharpe, 2000) to include covenants and loan size as key loan contract terms and finds that all five loan terms are jointly determined Moreover, this study is the first to provide evidence that borrowers and lenders trade off loan terms when addressing borrower information asymmetries It is also the first to show that borrowers accept more covenants but obtain larger amounts from their relationship lenders It augments the work of Bharath, Dahiya, Saunders, and Srinivasan (2011) by examining both price and non-price terms in a simultaneous equation model across revolving and term loans but finds no evidence that borrowers with higher information asymmetries obtain better loan terms from their relationship lenders Regarding methodology, this work extends prior studies by using a system of simultaneous equations to mitigate potential simultaneity problems, considering differences between revolving and term loans and obtaining different findings across these loan types This study reveals the endogeneity of loan selection and addresses the problem by using the borrower GVKEY and lender RSSD ID in the sampling selection to trace back prior lending relationships, thus improving the accuracy of the results x (Table H7 continued) VARIABLES (1) (2) AISD COLLATERAL Revolving Loans (3) MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) MATURITY (9) (10) COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics LN(TOTALASSETS) PROFITABILITY LEVERAGE M/B LN(ASSETMATURITY) EARNINGSVARIANCE TAX_ASSETS (0.008) (0.011) -0.190*** 0.073 0.087* -0.210*** -0.180* -0.093** 0.105 0.146*** -0.210*** (0.057) (0.039) (0.087) (0.049) (0.039) (0.098) (0.039) (0.122) (0.054) (0.040) 0.201*** 0.618*** 0.159* -0.408*** -0.685*** 0.186 0.198*** 0.429*** -0.322*** -0.845*** (0.063) (0.041) (0.093) (0.051) (0.042) (0.126) (0.027) (0.143) (0.061) (0.058) -0.016** -0.040*** 0.032** 0.002 0.019*** -0.060*** -0.010*** 0.029 -0.012 0.093*** (0.006) (0.015) (0.010) (0.006) (0.022) (0.004) (0.034) (0.016) (0.013) (0.008) CONCENTRATION 0.485*** -0.141** TANGIBILITY LN(1+COVERAGE) 0.473*** -0.093*** -0.015 (0.026) (0.018) -0.105*** -0.206*** (0.011) (0.029) 0.515*** 0.081*** (0.038) (0.030) 0.067*** 0.104*** (0.017) (0.037) -2.531*** -1.478*** (0.250) (0.516) 4.699*** 5.436*** (0.535) (1.064) 325 (Table H7 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) MATURITY (9) (10) COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics (cont.) REGULATED -0.260*** -1.177*** (0.072) (0.266) CFVOLATILITY -0.642*** -0.329 (0.189) (0.227) CURRENTRATIO -0.050*** -0.116*** (0.005) (0.008) Panel F: Lender Characteristic TOPLENDERS 0.001 0.025* 0.188*** -0.105*** -0.126*** -0.228*** 0.009 -0.183*** -0.078*** 0.254*** (0.017) (0.012) (0.032) (0.020) (0.013) (0.043) 0.008 (0.064) (0.028) (0.023) -0.114*** 0.071*** 0.123 0.353*** (0.039) (0.027) (0.075) (0.040) Panel G: Other Loan Characteristics SYNDICATION FIRSTLOAN TRANCHE -0.019 0.009 0.147*** -0.190*** -0.109*** 0.028 0.006 0.295*** -0.140*** -0.186*** (0.026) (0.019) (0.047) (0.031) (0.019) (0.063) (0.013) (0.095) (0.044) (0.030) 0.082*** 0.130* (0.021) (0.074) LENDERNUMBER RECAPITALIZATION 0.028*** 0.017*** (0.001) (0.001) 0.002 -0.017 -0.139*** 0.243*** 0.177*** 0.145** -0.006 -0.036 0.243*** 0.030 (0.023) (0.015) (0.037) (0.021) (0.016) (0.056) (0.011) (0.084) (0.034) (0.031) 326 (Table H7 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) (9) (10) MATURITY COVINDEX LN(FACSIZE) Panel G: Other Loan Characteristics (cont.) ACQUISITION OTHERPURPOSE 0.054* 0.020 -0.063 0.178*** -0.028 0.287*** 0.006 0.359*** 0.321*** -0.470*** (0.029) (0.019) (0.059) (0.028) (0.024) (0.067) (0.013) (0.098) (0.042) (0.035) -0.279*** -0.296*** -1.281*** 0.355*** 1.567*** 0.043 -0.004 0.907*** -0.321*** -1.002*** (0.051) (0.046) (0.059) (0.057) (0.028) (0.118) (0.022) (0.189) (0.099) (0.070) Panel H: Macroeconomic Factors LIBOR IRVOLATILITY TERMPREMIUM CREDITSPREAD Constant Observations R Adjusted R Ȥ2 -0.024*** -0.106*** (0.009) (0.024) 0.494 9.002*** (0.786) (1.773) -0.044** -0.244*** (0.020) (0.050) 0.299*** 0.085*** -0.508*** 0.194*** 0.390*** 0.703*** -0.013 -1.202*** 0.372*** 1.452*** (0.030) (0.020) (0.035) (0.024) (0.019) (0.141) (0.023) (0.133) (0.068) (0.058) 1.627*** 0.851*** -1.421*** -2.088*** 1.521*** 2.504*** -2.070*** -6.266*** (0.109) (0.132) (0.077) (0.071) (0.367) (0.368) (0.189) (0.181) 11,431 12,434 12,434 4,067 4,246 4,490 4,490 11,179 7,878 3,461 0.538 0.301 0.842 0.232 0.189 0.855 0.538 0.300 0.842 0.228 0.185 0.854 1586 4980 Pseudo R 0.298 0.143 Note: The superscripts ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively 327 246.9 1561 0.133 0.107 Table H8: Second stage regression results for RQ4 with lending relationships measured by REL(A)_3YEAR This table documents the interaction effects of information asymmetries and lending relationship on loan terms with REL(A)_3YEAR as a measure for lending relationships Column (1) through (5) and Column (6) through to (10) are, respectively, the second stage regressions of equations 3.11 through 3.15 (the AISD, COLLATERAL, MATURITY, COVINDEX, and LN(FACSIZE) equations, respectively) after including IAINDEX×REL(A)_3YEAR for revolving and term loan samples Numbers in parentheses are standard errors corrected for heteroscedasticity VARIABLES (1) AISD (2) COLLATERAL Revolving Loans (3) (4) (5) MATURITY COVINDEX LN(FACSIZE) (6) AISD (7) COLLATERAL Term Loans (8) (9) MATURITY COVINDEX (10) LN(FACSIZE) Panel A: Loan Terms Fitted COLLATERAL Fitted MATURITY Fitted COVINDEX Fitted LN(FACSIZE) 1.606*** 0.933*** 1.312*** -0.192*** 1.539*** 1.635*** 1.826*** -0.405*** (0.065) (0.111) (0.066) (0.048) (0.245) (0.326) (0.157) (0.112) -0.247*** -0.067*** 0.395*** 1.113*** -0.132* -0.004 0.142*** 1.274*** (0.032) (0.017) (0.021) (0.012) (0.070) (0.013) (0.036) (0.024) 0.117*** 0.108*** 0.415*** -0.289*** -0.018 0.024*** 0.101** 0.052*** (0.015) (0.012) (0.022) (0.013) (0.027) (0.005) (0.040) (0.013) -0.071*** -0.123*** 0.395*** -0.095*** -0.075** -0.032*** 0.338*** 0.077*** (0.016) (0.007) (0.016) (0.014) (0.032) (0.004) (0.030) (0.018) 0.026* 0.081*** -0.120*** -0.025 0.102*** 0.079** 0.015** 0.025 0.002 -0.033* (0.014) (0.010) (0.024) (0.015) (0.011) (0.032) (0.006) (0.051) (0.020) (0.017) -0.059 -0.006 -0.374*** 0.155** 0.455*** -0.410*** -0.033 0.119 0.306*** -0.227** (0.058) (0.046) (0.115) (0.074) (0.046) (0.156) (0.027) (0.246) (0.098) (0.088) -0.002 0.000 0.062* -0.028 -0.061*** 0.106* 0.012 -0.136 -0.073** 0.203*** (0.020) (0.012) (0.037) (0.024) (0.015) (0.056) (0.013) (0.083) (0.034) (0.030) Panel B: Information Asymmetry IAINDEX Panel C: Lending Relationship REL(A)_3YEAR Panel D: Interaction Term IAINDEX×REL(A)_3YEAR 328 (Table H8 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) (9) (10) MATURITY COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics LN(TOTALASSETS) PROFITABILITY LEVERAGE M/B LN(ASSETMATURITY) EARNINGSVARIANCE TAX_ASSETS (0.008) (0.011) -0.190*** 0.072 0.089* -0.206*** -0.178* -0.093** 0.114 0.143*** -0.222*** (0.057) (0.039) (0.087) (0.049) (0.039) (0.098) (0.039) (0.123) (0.054) (0.040) 0.196*** 0.620*** 0.145 -0.405*** -0.671*** 0.179 0.196*** 0.422*** -0.320*** -0.832*** (0.063) (0.041) (0.093) (0.051) (0.042) (0.126) (0.027) (0.143) (0.061) (0.058) -0.016** -0.040*** 0.032** 0.001 0.019*** -0.060*** -0.010*** 0.029 -0.013 0.094*** (0.006) (0.015) (0.010) (0.006) (0.022) (0.004) (0.034) (0.016) (0.013) (0.008) CONCENTRATION 0.492*** -0.143** TANGIBILITY LN(1+COVERAGE) 0.478*** -0.093*** -0.014 (0.026) (0.018) -0.105*** -0.205*** (0.011) (0.029) 0.516*** 0.082*** (0.038) (0.031) 0.067*** 0.104*** (0.017) (0.037) -2.550*** -1.467*** (0.250) (0.516) 4.737*** 5.487*** (0.535) (1.062) 329 (Table H8 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) MATURITY (9) (10) COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics (cont.) REGULATED -0.271*** -1.167*** (0.072) (0.267) CFVOLATILITY -0.642*** -0.331 (0.189) (0.227) CURRENTRATIO -0.051*** -0.116*** (0.005) (0.008) Panel F: Lender Characteristic TOPLENDERS 0.001 0.026** 0.185*** -0.108*** -0.125*** -0.232*** 0.009 -0.179*** -0.087*** 0.252*** (0.017) (0.012) (0.032) (0.020) (0.013) (0.044) (0.008) (0.064) (0.028) (0.023) -0.115*** 0.072*** 0.125* 0.354*** (0.039) (0.027) (0.075) (0.040) Panel G: Other Loan Characteristics SYNDICATION FIRSTLOAN TRANCHE -0.017 0.006 0.161*** -0.188*** -0.122*** 0.037 0.006 0.295*** -0.127*** -0.190*** (0.026) (0.019) (0.046) (0.031) (0.019) (0.062) (0.013) (0.095) (0.044) (0.030) 0.081*** 0.126* (0.020) (0.074) LENDERNUMBER RECAPITALIZATION 0.028*** 0.016*** (0.001) (0.001) 0.002 -0.018 -0.142*** 0.244*** 0.181*** 0.146*** -0.006 -0.041 0.242*** 0.035 (0.023) (0.015) (0.037) (0.021) (0.016) (0.057) (0.011) (0.084) (0.034) (0.031) 330 (Table H8 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) (9) (10) MATURITY COVINDEX LN(FACSIZE) Panel G: Other Loan Characteristics (cont.) ACQUISITION OTHERPURPOSE 0.053* 0.020 -0.063 0.180*** -0.025 0.286*** 0.006 0.353*** 0.323*** -0.463*** (0.029) (0.019) (0.059) (0.028) (0.024) (0.067) (0.013) (0.099) (0.042) (0.035) -0.276*** -0.297*** -1.285*** 0.353*** 1.569*** 0.042 -0.004 0.908*** -0.317*** -1.004*** (0.050) (0.046) (0.059) (0.057) (0.028) (0.117) (0.022) (0.189) (0.099) (0.070) Panel H: Macroeconomic Factors LIBOR IRVOLATILITY TERMPREMIUM CREDITSPREAD Constant Observations R Adjusted R Ȥ2 -0.023*** -0.108*** (0.009) (0.024) 0.521 9.183*** (0.784) (1.774) -0.043** -0.249*** (0.020) (0.050) 0.299*** 0.085*** -0.505*** 0.194*** 0.385*** 0.713*** -0.011 -1.199*** 0.376*** 1.445*** (0.030) (0.020) (0.035) (0.024) (0.019) (0.141) (0.023) (0.133) (0.068) (0.058) 1.617*** 0.852*** -1.452*** -2.109*** 1.435*** 2.467*** -2.074*** -6.226*** (0.108) (0.131) (0.076) (0.071) (0.359) (0.365) (0.184) (0.180) 11,431 12,434 12,434 4,067 4,246 4,490 4,490 11,179 7,878 3,461 0.539 0.300 0.842 0.230 0.189 0.855 0.538 0.299 0.842 0.226 0.185 0.854 1591 4973 Pseudo R 0.298 0.143 Note: The superscripts ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively 331 245.9 1584 0.132 0.107 Table H9: Second stage regression results for RQ4 with lending relationships measured by REL(N)_3YEAR This table documents the interaction effects of information asymmetries and lending relationship on loan terms with REL(N)_3YEAR as a measure for lending relationships Column (1) through (5) and Column (6) through to (10) are, respectively, the second stage regressions of equations 3.11 through 3.15 (the AISD, COLLATERAL, MATURITY, COVINDEX, and LN(FACSIZE) equations, respectively) after including IAINDEX×REL(N)_3YEAR for revolving and term loan samples Numbers in parentheses are standard errors corrected for heteroscedasticity VARIABLES (1) AISD Revolving Loans (2) (3) (4) (5) COLLATERAL MATURITY COVINDEX LN(FACSIZE) (6) AISD Term Loans (7) (8) (9) (10) COLLATERAL MATURITY COVINDEX LN(FACSIZE) Panel A: Loan Terms Fitted COLLATERAL Fitted MATURITY Fitted COVINDEX Fitted LN(FACSIZE) 1.606*** 0.936*** 1.311*** -0.196*** 1.539*** 1.640*** 1.834*** -0.391*** (0.066) (0.111) (0.066) (0.048) (0.245) (0.326) (0.157) (0.112) -0.247*** -0.066*** 0.395*** 1.113*** -0.134* -0.004 0.142*** 1.274*** (0.032) (0.017) (0.021) (0.012) (0.070) (0.013) (0.036) (0.025) 0.117*** 0.108*** 0.415*** -0.287*** -0.018 0.024*** 0.101** 0.053*** (0.015) (0.012) (0.022) (0.013) (0.027) (0.005) (0.040) (0.013) -0.071*** -0.123*** 0.394*** -0.095*** -0.075** -0.032*** 0.339*** 0.078*** (0.016) (0.007) (0.016) (0.014) (0.032) (0.004) (0.030) (0.018) 0.025* 0.084*** -0.117*** -0.029* 0.098*** 0.075** 0.016** 0.019 0.002 -0.034** (0.014) (0.010) (0.024) (0.015) (0.011) (0.032) (0.006) (0.051) (0.020) (0.017) -0.067 0.015 -0.337*** 0.117 0.394*** -0.452*** -0.027 0.063 0.312*** -0.239*** (0.059) (0.047) (0.117) (0.075) (0.047) (0.159) (0.027) (0.248) (0.100) (0.090) 0.001 -0.005 0.053 -0.017 -0.047*** 0.120** 0.010 -0.121 -0.076** 0.209*** (0.021) (0.012) (0.038) (0.024) (0.016) (0.057) (0.013) (0.084) (0.035) (0.030) Panel B: Information Asymmetry IAINDEX Panel C: Lending Relationship REL(N)_3YEAR Panel D: Interaction Term IAINDEX×REL(N)_3YEAR 332 (Table H9 continued) VARIABLES (1) (2) AISD COLLATERAL Revolving Loans (3) MATURITY (4) (5) (6) (7) COVINDEX LN(FACSIZE) AISD COLLATERAL Term Loans (8) (9) (10) MATURITY COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics LN(TOTALASSETS) PROFITABILITY LEVERAGE M/B LN(ASSETMATURITY) EARNINGSVARIANCE TAX_ASSETS (0.008) (0.011) -0.189*** 0.075 0.087* -0.211*** -0.178* -0.092** 0.115 0.142*** -0.223*** (0.057) (0.039) (0.087) (0.049) (0.039) (0.098) (0.039) (0.123) (0.054) (0.040) 0.196*** 0.619*** 0.144 -0.404*** -0.669*** 0.181 0.196*** 0.420*** -0.322*** -0.835*** (0.063) (0.041) (0.093) (0.051) (0.043) (0.126) (0.027) (0.143) (0.061) (0.058) -0.016** -0.040*** 0.032** 0.001 0.020*** -0.060*** -0.010*** 0.029 -0.012 0.094*** (0.006) (0.015) (0.010) (0.006) (0.022) (0.004) (0.034) (0.016) (0.013) (0.008) CONCENTRATION 0.492*** -0.143** TANGIBILITY LN(1+COVERAGE) 0.480*** -0.093*** -0.014 (0.026) (0.018) -0.104*** -0.204*** (0.011) (0.029) 0.516*** 0.082*** (0.038) (0.031) 0.067*** 0.103*** (0.017) (0.037) -2.553*** -1.471*** (0.250) (0.516) 4.747*** 5.508*** (0.535) (1.061) 333 (Table H9 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) MATURITY (9) (10) COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics (cont.) REGULATED -0.271*** -1.168*** (0.072) (0.267) CFVOLATILITY -0.641*** -0.339 (0.189) (0.227) CURRENTRATIO -0.051*** -0.116*** (0.005) (0.008) Panel F: Lender Characteristic TOPLENDERS 0.001 0.026** 0.183*** -0.107*** -0.120*** -0.232*** 0.009 -0.178*** -0.086*** 0.254*** (0.017) (0.012) (0.032) (0.020) (0.013) (0.044) (0.008) (0.064) (0.028) (0.023) -0.115*** 0.069*** 0.125* 0.351*** (0.039) (0.027) (0.075) (0.040) Panel G: Other Loan Characteristics SYNDICATION FIRSTLOAN TRANCHE -0.016 (0.006) 0.166*** -0.189*** -0.131*** 0.039 0.006 0.293*** -0.128*** -0.191*** (0.026) 0.019 (0.046) (0.031) (0.019) (0.062) (0.013) (0.094) (0.044) (0.030) 0.081*** 0.127* (0.020) (0.074) LENDERNUMBER RECAPITALIZATION 0.028*** 0.016*** (0.001) (0.001) 0.001 -0.018 -0.142*** 0.244*** 0.181*** 0.145** -0.006 -0.042 0.242*** 0.035 (0.023) (0.015) (0.037) (0.021) (0.016) (0.057) (0.011) (0.084) (0.034) (0.031) 334 (Table H9 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) Term Loans (8) (6) (7) (9) (10) AISD COLLATERAL MATURITY COVINDEX LN(FACSIZE) Panel G: Other Loan Characteristics (cont.) ACQUISITION OTHERPURPOSE 0.053* 0.020 -0.063 0.179*** -0.027 0.286*** 0.006 0.351*** 0.323*** -0.465*** (0.029) (0.019) (0.059) (0.028) (0.024) (0.067) 0.013 (0.099) (0.042) (0.035) -0.275*** -0.297*** -1.286*** 0.354*** 1.572*** 0.046 -0.004 0.910*** -0.317*** -1.005*** (0.050) (0.046) (0.059) (0.057) (0.028) (0.117) 0.022 (0.189) (0.099) (0.070) Panel H: Macroeconomic Factors LIBOR IRVOLATILITY TERMPREMIUM CREDITSPREAD Constant Observations R Adjusted R Ȥ2 -0.023*** -0.108*** (0.009) (0.024) 0.527 9.143*** (0.783) (1.775) -0.043** -0.247*** (0.020) (0.050) 0.299*** 0.085*** -0.504*** 0.194*** 0.383*** 0.710*** -0.012 -1.201*** 0.375*** 1.446*** (0.030) (0.020) (0.035) (0.024) (0.019) (0.141) (0.023) (0.133) (0.068) (0.058) 1.621*** 0.839*** -1.437*** -2.090*** 1.452*** 2.486*** -2.080*** -6.240*** (0.108) (0.130) (0.076) (0.071) (0.359) (0.364) (0.184) (0.181) 11,431 12,434 12,434 4,067 4,246 4,490 4,490 11,179 7,878 3,461 0.539 0.300 0.842 0.230 0.189 0.855 0.538 0.299 0.842 0.226 0.185 0.854 1589 4976 Pseudo R 0.298 0.143 Note: The superscripts ***, **, and * indicate statistical significance at the 1%, 5%, and 10% levels, respectively 335 245.8 1584 0.132 0.108 H.3 ENDOGENEITY OF LOAN TYPE SELECTION The test results related to RQ4 discuessed in Section 5.5 assume that loan type selection (i.e., the choice to borrow or lend using revolving or term loans) is exogenous and so these loan types are examined separately This appendix instead treats this loan type selection as endogenous and follows the steps to conduct the robustness test as detailed in Section 3.5.3 Table H10 documents the regressions for testing hypotheses associated with RQ4 after addressing the endogeneity of loan type selection Althoug loan type selection is found to be endogeous, the findings not differ with those in Chapter 5, Section 5.5 336 Table H10: Second stage regression results for RQ4 after controlling for the endogeneity of loan type selection This table documents the interaction effects of information asymmetries and lending relationship on loan terms after controlling for the endogeneity of loan type selection by including IMR (for REVOLVING =1) and MR (for REVOLVING =0) in loan term equation for revolving loans Column (1) through (5) and Column (6) through to (10) are, respectively, the second stage regressions of equations 3.11 through 3.15 (the AISD, COLLATERAL, MATURITY, COVINDEX, and LN(FACSIZE) equations, respectively) after including IAINDEX×REL(D) Numbers in parentheses are standard errors corrected for heteroscedasticity VARIABLES (1) AISD (2) COLLATERAL Revolving Loans (3) (4) (5) MATURITY COVINDEX LN(FACSIZE) (6) AISD (7) COLLATERAL Term Loans (8) (9) (10) MATURITY COVINDEX LN(FACSIZE) Panel A: Loan Terms Fitted COLLATERAL Fitted MATURITY Fitted COVINDEX Fitted LN(FACSIZE) 1.501*** 0.945*** 1.559*** -0.244*** 1.065*** 1.451*** 1.834*** -0.132 (0.068) (0.121) (0.074) (0.051) (0.260) (0.372) (0.173) (0.122) -0.288*** -0.044*** 0.409*** 1.114*** -0.628*** -0.025* 0.144*** 1.288*** (0.033) (0.017) (0.021) (0.012) (0.098) (0.013) (0.039) (0.023) 0.099*** 0.083*** 0.404*** -0.287*** -0.111*** 0.021*** 0.086** 0.055*** (0.015) (0.011) (0.022) (0.013) (0.029) (0.005) (0.041) (0.013) -0.043** -0.077*** 0.403*** -0.117*** 0.274*** -0.010* 0.371*** 0.075*** (0.017) (0.008) (0.016) (0.014) (0.058) (0.006) (0.036) (0.022) 0.088*** 0.157*** -0.106*** -0.135*** 0.114*** 0.357*** 0.035*** 0.067 -0.002 -0.121*** (0.018) (0.012) (0.033) (0.021) (0.014) (0.056) (0.008) (0.074) (0.029) (0.030) -0.010 0.050 -0.296*** 0.042 0.351*** -0.518*** -0.046* -0.046 0.216** 0.094 (0.055) (0.043) (0.106) (0.067) (0.045) (0.138) (0.028) (0.223) (0.090) (0.083) -0.018 -0.013 0.026 0.012 -0.021 0.105** 0.022 -0.050 -0.053* 0.072*** (0.019) (0.011) (0.034) (0.022) (0.014) (0.048) (0.013) (0.076) (0.031) (0.028) Panel B: Information Asymmetry IAINDEX Panel C: Lending Relationship REL(D) Panel D: Interaction Term IAINDEX×REL(D) 337 (Table H10 continued) VARIABLES (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) MATURITY (9) (10) COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics LN(TOTALASSETS) PROFITABILITY LEVERAGE M/B CONCENTRATION LN(ASSETMATURITY) EARNINGSVARIANCE TAX_ASSETS REGULATED 0.409*** (0.008) (0.016) -0.009 0.047 0.088 -0.133** -0.149*** 0.239** -0.023 0.218 0.141** -0.479*** (0.061) (0.041) (0.097) (0.055) (0.043) (0.117) (0.042) (0.154) (0.065) (0.066) 0.022 0.065 0.135 -0.022 -0.796*** -0.422*** 0.077** 0.142 -0.311*** -0.263** (0.069) (0.058) (0.125) (0.067) (0.054) (0.158) (0.035) (0.258) (0.091) (0.134) -0.020** -0.020*** 0.031** -0.003 0.022*** -0.055** -0.005 0.036 -0.013 0.064*** (0.008) (0.006) (0.015) (0.010) (0.006) (0.022) (0.004) (0.035) (0.017) (0.015) TANGIBILITY LN(1+COVERAGE) 0.481*** -0.033 -0.011 (0.026) (0.018) -0.092*** -0.050 (0.011) (0.035) 0.261*** 0.047 (0.040) (0.031) 0.068*** 0.107*** (0.017) (0.037) -2.592*** -1.556*** (0.252) (0.522) 4.761*** 5.559*** (0.535) (1.068) -0.258*** -0.955*** (0.076) (0.325) 338 (Table H10 continued) (1) (2) Revolving Loans (3) AISD COLLATERAL MATURITY VARIABLES (4) (5) COVINDEX LN(FACSIZE) (6) (7) AISD COLLATERAL Term Loans (8) (9) (10) MATURITY COVINDEX LN(FACSIZE) Panel E: Other Borrower Characteristics (cont.) CFVOLATILITY -0.531*** -0.324 (0.185) (0.228) CURRENTRATIO -0.050*** -0.121*** (0.005) (0.008) Panel F: Lender Characteristic TOPLENDERS 0.029 0.071*** 0.192*** -0.171*** -0.115*** -0.127*** 0.024*** -0.139* -0.082*** 0.164*** (0.018) (0.012) (0.034) (0.021) (0.014) (0.047) (0.008) (0.075) (0.031) (0.030) -0.066* 0.072*** 0.108 0.359*** (0.039) (0.027) (0.074) (0.040) Panel G: Other Loan Characteristics SYNDICATION FIRSTLOAN TRANCHE -0.034 -0.004 0.121** -0.153*** -0.088*** 0.121* 0.006 0.288*** -0.133*** -0.192*** (0.027) (0.020) (0.048) (0.031) (0.020) (0.064) (0.013) (0.097) (0.044) (0.030) 0.119*** 0.396*** (0.021) (0.083) LENDERNUMBER RECAPITALIZATION ACQUISITION OTHERPURPOSE 0.027*** 0.016*** (0.001) (0.001) -0.046* -0.121*** -0.141*** 0.340*** 0.149*** -0.237*** -0.045*** -0.130 0.248*** 0.216*** (0.024) (0.019) (0.043) (0.023) (0.018) (0.082) (0.016) (0.113) (0.045) (0.046) -0.167*** -0.447*** -0.083 0.558*** -0.132*** -0.579*** -0.092*** 0.106 0.332*** 0.022 (0.047) (0.049) (0.105) (0.050) (0.041) (0.151) (0.031) (0.225) (0.082) (0.105) -0.369*** -0.230*** -1.289*** 0.417*** 1.569*** 0.682*** 0.030 0.963*** -0.321*** -1.147*** (0.054) (0.045) (0.060) (0.057) (0.028) (0.150) (0.013) (0.193) (0.104) (0.071) 339 [...]... across loan types In addition, the interaction effect of information asymmetries and lending relationships on loan terms studied in this thesis extends the findings in the bank lending literature This study differs from that of Bharath et al (2011) by also examining non-price terms and separating revolving and term loans It therefore seems to be the first to find different results across the two loan types... summarizes the findings of the four research questions Regarding RQ1, Durbin–Wu–Hausman exogeneity tests first indicate that all of five loan terms are jointly determined for both revolving and term loans Based on the simultaneous equation model, second-stage regressions then provide further information on the relations between these loan terms for revolving and term loans 17 separately Although the findings... type (i.e., revolving or term loan) Regarding lending relationships and loan terms, this thesis extends the findings in the literature (e.g., Bharath et al., 2011; Saunders and Steffen, 2011) by investigating the impact of lending relationships on loan covenants and sizes and finding that borrowers obtain larger loans with more covenants from their relationship lenders These findings, however, do not... loans are included.10 Loans before 1994 are excluded since loan covenant information is very limited before then Finally, given the focus on the two main loan types (i.e., revolving and term loans), other loans (e.g., letters of credit, demand loans, bridge loans) are excluded 1.5.2 Methodology This section first outlines the methodology associated with RQ1, RQ2, and RQ3 and then that for RQ4 Regarding... contributions regarding the jointness of the key loan terms (RQ1), the effects of borrower information asymmetries on these terms (RQ2), the lending relationship impact on loan covenants and size (RQ3), the interaction effects of information asymmetries and lending relationships on loan terms (RQ4), and improvements in methodology and sample In relation loan term jointness, this is believed to be the first study... determining that the jointness differs across the two loan types With regard to the impact of information asymmetry on these loan terms, this thesis appears to be the first to examine them in the context of loan term jointness It finds that borrowers and lenders trade off loan terms when addressing borrower information asymmetries This finding differs from that of prior studies (e.g., Berger, Espinosa-Vega,... used interchangeably in this thesis 1 research objectives and hypotheses Section 1.5 summarizes the data, methodology, and empirical findings Section 1.6 discusses the thesis contributions to the literature while Section 1.7 states the implications of the findings Section 1.8 outlines the thesis 1.2 BACKGROUND This section provides an overview of information asymmetries, the lending process, loan contract... covenants and find contrasting results Ivashina and Kovner (2011) only examine the impact of the lending relationships on one covenant (the ratio of maximum debt to earnings before interest, taxes, depreciation, and amortization (EBITDA)).7 None of these studies, furthermore, examines the lending relationship impact on loan terms in the context of their jointmess Since Section 5.2 of Chapter 5 answers yes... loan covenants and size Of studies on lending relationships and loan terms, only that of Alexandre et al (2011) examines lending relationship effects on loan size Few studies investigate the impact of lending relationships on loan covenants and their results are mixed For example, Lou (2011), Niskanen and Niskanen (2004), and Prilmeier (2011) all examine the lending relationship impact on covenants and... and spiritual encouragement I am also greatly indebted to my associate supervisor Dr Shrimal Perera for his critical and constructive comments, continual guidance, and intellectual support to complete this thesis I would like to thank the Ministry of Education and Training of Vietnam for their generous financial support of my PhD studies I also wish to thank the Department of Accounting & Finance of