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Accounting quality, bank monitoring, and performance pricing loans

Author

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  • Yan Hu

    (University of La Verne)

  • Connie Mao

    (Temple University)

Abstract

We provide new evidence on the determinants of performance pricing provisions in bank loan contracts. We find that firms that are easier to monitor, such as those with better accounting quality, lower information opacity, or a stronger relationship with the lender are more likely to have performance pricing loans. The use of performance pricing is less likely after financial restatement events. Furthermore, we find that the likelihood of using accounting-based (as opposed to credit-rating-based) pricing provisions increases as the firm’s accounting quality increases, and as the strength of the prior lending relation increases. Our results are robust to alternative measures of accounting quality, information opacity, and bank monitoring, and suggest that monitoring costs have a significant impact on the design of debt contracts.

Suggested Citation

  • Yan Hu & Connie Mao, 2017. "Accounting quality, bank monitoring, and performance pricing loans," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 569-597, October.
    • Handle: RePEc:kap:rqfnac:v:49:y:2017:i:3:d:10.1007_s11156-016-0601-1
    DOI: 10.1007/s11156-016-0601-1
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    2. Yongtao Hong & Fariz Huseynov & Sabuhi Sardarli & Wei Zhang, 2020. "Bank earnings management and analyst coverage: evidence from loan loss provisions," Review of Quantitative Finance and Accounting, Springer, vol. 55(1), pages 29-54, July.
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    More about this item

    Keywords

    Performance pricing; Accounting quality; Information opacity; Bank monitoring Debt contracting;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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