The objective of this thesis was first to investigate whether the five key loan contract terms (i.e., price, collateral, maturity, covenants, and size) are simultaneously determined. Given the loan terms’ jointness, the impact of information asymmetries, lending relationships and their interaction effects on these terms were then examined in the context of U.S. lending market for large firms (borrowers), across revolving and term loans separately. To achieve these objectives, four research questions guided by the gaps in the prior academic literature (identified in Chapter 1, Sections 1.3 and 1.4) were developed. Table 6.1 summarizes these four research questions, their 14 associated hypotheses, and findings.
Table 6.1: Research questions, related hypotheses and results
This table presents a summary of the thesis’ four research questions and their 14 associated hypotheses and findings. The research questions are raised in Chapter 1 and their hypotheses are developed in Chapter 2. The data and methodology to test these hypotheses and variable selections and measurements are documented in Chapters 3 and 4, respectively. The findings are discussed in Chapter 5.
Research Questions and Related Hypotheses Results
Revolving Loans Term Loans Panel A – RQ1: Are loan contract terms (i.e., price, collateral, maturity, covenants, and size) simultaneously determined? Yes Yes
Hypotheses
H1.1:Loan terms are simultaneously determined. Supported Supported
H1.2: Loan prices have unidirectional relations with non-price terms. Supported Partly supported H1.3: Each non-price term has a bidirectional relation with the other non-price terms. Supported Partly supported Panel B – RQ2: Given their jointness, are loan terms (i.e., price, collateral, maturity, covenants, and size) traded off when addressing
borrower information asymmetries? Yes Yes
Hypotheses
H2.1: High information asymmetry borrowers are charged higher prices. Supported Supported H2.2: High information asymmetry borrowers are more likely to be required collateral. Supported Supported H2.3: Loan maturities are shorter for high information asymmetry borrowers. Supported Not supported H2.4: High information asymmetry borrowers are subject to fewer covenants. Supported Not supported H2.5: High information asymmetry borrowers obtain large loans. Supported Supported Panel C – RQ3: Given the jointness of loan terms, do lending relationships affect loan covenants and size? Yes Yes Hypotheses H3.1: Loans based on lending relationships have more covenants. Supported Supported
H3.2: Loans based on lending relationships are larger. Supported Supported
Panel D – RQ4: Given the jointness of loan terms, do borrowers with higher information asymmetries benefit from better prices and non-
price terms from their relationship lenders? No No
Hypotheses
H4.1: Higher information asymmetry borrowers receive lower prices when borrowing from their relationship lenders. Not supported Not supported H4.2: Higher information asymmetry borrowers are less likely to be required collateral when borrowing from their relationship
lenders. Not supported Not supported
H4.3: Higher information asymmetry borrowers obtain longer maturities when borrowing from their relationship lenders. Not supported Not supported H4.4: Higher information asymmetry borrowers obtain larger loans when borrowing from their relationship lenders. Not supported Supported
The following Sections 6.2.1 through 6.2.4 summarize the hypotheses and main findings associated with each of the four research questions RQ1, RQ2, RQ3, and RQ4, respectively.
6.2.1. RQ1: Are loan contract terms (i.e., price, collateral, maturity, covenants, and size) simultaneously determined?
This thesis first addresses RQ1 by testing hypothesis H1.1 (loan terms are simultaneously determined) and then two additional hypotheses, H1.2 (loan prices have unidirectional relations with non-price terms) and H1.3 (each non-price term has a bidirectional relation with the others). The test results for H1.1 are reported in Table 5.1 while the coefficients for the dependent (fitted) loan terms of the second- stage regression results (Equations 3.11–3.15) used to test H1.2 and H1.3 are reported in Panel A of Table 5.2. These test results are summarized in Panel A of Table 6.1.
Given the DWH exogeneity tests, the null hypothesis that the five key loan terms of AISD,COLLATERAL,MATURITY,COVINDENX, and LN(FACSIZE) (i.e., Equations 3.1–3.5, respectively) should be treated as exogenous is rejected for either loan type. This finding supports H1.1 that these five key loan terms are simultaneously determined for both revolving and term loans. Since H1.1 is supported, H1.2 is then tested by examining the coefficients for dependent loan terms (ߙ,ߙெ,ߙ௩, and ߙௌ) from the second-stage regressions for the loan price equation (Equation 3.11). The hypothesis H1.3 is similarly tested by examining the coefficients for the dependent non-price terms (ߙெ, ߙ௩, ߙௌ ߙெ, ߙெ௩, ߙெௌ,
ߙ௩, ߙ௩ெ,ߙௌǡߙௌ, ߙௌெ, and ߙௌ௩) in the second-stage regressions for the non- price term equations (Equations 3.12–3.15).80
Determination of the jointness of these five loan terms (H1.1) is consistent with Melnik and Plaut (1986) suggestion that loan terms should not be negotiated separately. The second-stage regression estimates (Equations 3.11–3.15) support H1.2 (loan prices have unidirectional relations with non-price terms) and H1.3 (each non-price term has a bidirectional relation with the other non-price terms) for revolving loans, but only partly support H1.2 and H1.3 for term loans. Although these findings differ for both loan types, they nevertheless confirm the prior lending literature (Dennis et al., 2000; Bharath et al., 2011) and they also reflect the practical lending process (Standard & Poor's, 2011a) that lenders first negotiate non-price terms and subsequently decide on loan prices based thereon.
Overall, the answer to RQ1 is therefore yes. Loan terms are determined together, as a ‘package’. Furthermore, non-price terms are negotiated first and the loan price is then designed. This jointness, however, differs across loan types: For revolving loans, all non-price terms determine prices and other non-price terms. In contrast, for term loans, one loan term, covenants, plays no role in shaping loan prices, while maturity has no impact on collateral decisions.
80 To conduct the second-stage regression (Equations 3.11–3.15), the first–stage regressions (Equations 3.6–3.10) are employed to obtain the fitted values of the endogenous loan terms in Equations 3.11 through 3.15.
6.2.2. RQ2: Given their jointness, are loan terms (i.e., price, collateral, maturity, covenants, and size) traded off when addressing borrower information asymmetries?
In this thesis RQ2 aims to answer whether loan terms are traded off by their lenders and borrowers when addressing borrower information asymmetries, given their jointness. This issue is addressed by using the two-stage regressions of the simultaneous equation system (i.e., Equations 3.6–3.15) to test five hypotheses: H2.1 (high information asymmetry borrowers are charger higher prices), H2.2 (high information asymmetry borrowers are more likely to be required collateral), H2.3 (loan maturities are shorter for high information asymmetry borrowers), H2.4 (high information asymmetry borrowers are subject to fewer covenants), and H2.5 (high information asymmetry borrowers obtain larger loans).
The test results are documented in Panel B of Table 5.2 and summarized in Panel B of Table 6.1. For revolving loans, the results support all the hypotheses (H2.1–H2.5), suggesting that high information asymmetry borrowers are charged higher prices, are more likely to be required collateral, obtain shorter maturities, but borrow larger loans with fewer covenants. For term loans, the evidence only supports H2.1, H2.2, and H2.5, implying that high information asymmetry borrowers pay higher prices, are more likely to be required collateral, but obtain larger loans.
Generally, the answer to RQ2 is therefore yes. In both loan types, high information asymmetry borrowers accept higher prices and are more likely to be required collateral in return for larger loans. The trade-off of other loan terms,
however, differs between revolving and term loans: While revolving loan contracts have shorter maturity and fewer covenants, they are not important for term loans.
The findings suggest that high information asymmetry borrowers have some power in negotiating loan contracts since they can obtain better loan terms by accepting other, less favourable ones. Although the trade-off differs between loan types, these borrowers prefer larger loans and will accept higher prices and pledge collateral to obtain them. The findings confirm those of Melnik and Plaut (1986) and Menkhoff et al. (2012), in that borrowers may trade less favourable terms in return for more favourable ones and can thus achieve better loan contracts.
6.2.3. RQ3: Given the jointness of loan terms, do lending relationships affect loan covenants and size?
Here RQ3 is addressed by testing the two hypotheses H3.1 (loans based on lending relationships have more covenants) and H3.2 (loans based on lending relationships are larger). This may be because lending relationships can produce borrower information for lenders. Since loan terms are found to be jointly determined (RQ1’s hypotheses), the previous simultaneous equations (i.e., Equations 3.6–3.15) are used to test H3.1 and H3.2 as well. The second-stage regressions (Equations 3.14 and 3.15) provide the coefficients for the lending relationship measure, the variable of interest, to test these two hypotheses. The test results are presented in Panel C of Table 5.2. Panel C of Table 6.1 summarizes RQ3 and its associated hypotheses and empirical findings.
The findings support H3.1 and H3.2 for both loan types. The answer to RQ3 is therefore yes. The findings suggest that borrowers obtain larger loans with more covenants from their relationship lenders for both revolving and term loans. For borrowers, understanding these outcomes can help them in their loan negotiations.
For lenders, more borrower information obtained via their lending relationships can help them to design and monitor covenants more efficiently. This in turn may allow them to grant larger loans to their relationship borrowers. The findings on loan covenants and loan size extend to prior relationship lending studies (for example, Bharath et al., 2011; Saunders and Steffen, 2011).
6.2.4. RQ4: Given the jointness of loan terms, do borrowers with higher information asymmetries benefit from better price and non-price terms from their relationship lenders?
In this thesis RQ4 is addressed by testing four hypotheses: When borrowing from their relationship lenders, higher information asymmetry borrowers receive lower prices (H4.1), are the less likely to be required collateral (H4.2), obtain longer maturities (H4.3), and are granted larger loans (H4.4). To test these hypotheses, the model used to test the hypotheses related to RQ1, RQ2, and RQ3 (Equations 3.6–
3.15) are modified by including an interaction variable, which is the product of information asymmetries and lending relationships. Panel D of Table 6.1 summarizes RQ4 and its associated hypotheses and empirical findings.
The regression results are reported in Appendix G, Table G1, and summarized in Table 5.6. They do not support H4.1 through H4.4 for revolving loans and only support H4.4 for term loans.
Overall, the answer to RQ4 is therefore no: Borrowers with higher information asymmetries cannot generally obtain lower prices and more favourable non-price terms from their relationship lenders. This may be because the incremental information from their lending relationships is not sufficient to justify such benefits.
For term loans, however, these borrowers can at least obtain larger loans from their relationship lenders. Therefore lending relationship lenders may not be more attractive. These findings extend those of Bharath et al. (2011) by including collateral, maturities, and size in a context that allows for jointness between loan terms and examines revolving and term loans separately.