Corporate Boards and Performance Pricing in Private Debt Contracts

44 Pages Posted: 1 Feb 2016 Last revised: 22 Feb 2017

See all articles by Intan Suryani Abu Bakar

Intan Suryani Abu Bakar

International Islamic University of Malaysia (IIUM)

Arifur Khan

Deakin University - School of Accounting, Economics and Finance

Paul R. Mather

La Trobe University

George Tanewski

Deakin University - School of Accounting Economics and Finance

Date Written: February 2017

Abstract

We examine the effects of corporate board characteristics on the use of performance pricing in debt contracts. Performance pricing is a recent innovation that plays a role in addressing some debt contracting problems by linking the ex-ante pricing of debt with ex-post firm performance. Results show that debtholders are more likely to use performance pricing in loan contracts for borrower firms with greater board independence and CEOs with higher share ownership, whereas debtholders are less likely to use performance pricing when firms have smaller boards. Debtholders also are more likely to include an interest increasing performance pricing provision in loan contracts when CEOs’ incentives are aligned via higher share ownership, but they are less likely to use them in debt contracts when board ownership is lower. Overall, the results suggest debtholders perceive that characteristics associated with effective boards are beneficial and factor them in their contracting decisions.

Keywords: Performance pricing, covenants, governance, private debt

JEL Classification: M40, M41, M49

Suggested Citation

Abu Bakar, Intan Suryani and Khan, Arifur and Mather, Paul R. and Tanewski, George, Corporate Boards and Performance Pricing in Private Debt Contracts (February 2017). Available at SSRN: https://ssrn.com/abstract=2722888 or http://dx.doi.org/10.2139/ssrn.2722888

Intan Suryani Abu Bakar

International Islamic University of Malaysia (IIUM) ( email )

P.O. Box 10
Jalan Gombak
Kuala Lumpur, selangor 50728
Malaysia

Arifur Khan (Contact Author)

Deakin University - School of Accounting, Economics and Finance ( email )

221 Burwood Highway
Burwood, Victoria 3125
Australia

Paul R. Mather

La Trobe University ( email )

School of Accounting
Bundoora
Melbourne, Victoria 3086
Australia
+61-3-9479-5264 (Phone)

George Tanewski

Deakin University - School of Accounting Economics and Finance ( email )

Burwood, Victoria 3215
Australia

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