Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/102699
Authors: 
Bannier, Christina E.
Wiemann, Markus
Year of Publication: 
2014
Series/Report no.: 
CFS Working Paper Series 476
Abstract: 
This paper studies the use of performance pricing (PP) provisions in debt contracts and compares accounting-based with rating-based pricing designs. We find that rating-based provisions are used by volatile-growth borrowers and allow for stronger spread increases over the credit period. Accounting-based provisions are employed by opaque-growth borrowers and stipulate stronger spread reductions. Further, a higher spread-increase potential in rating-based contracts lowers the spread at the loan's inception and improves the borrower's performance later on. In contrast, a higher spread-decrease potential in accounting-based contracts lowers the initial spread and raises the borrower's leverage afterwards. The evidence indicates that rating-based contracts are indeed employed for different reasons than accounting-based contracts: the former to signal a borrower's quality, the latter to mitigate investment inefficiencies.
Subjects: 
Performance pricing
performance-sensitive debt
accounting data
credit ratings
underinvestment
collateral
JEL: 
G30
M40
Document Type: 
Working Paper

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