Bank Loan Commitment Contracts: Data, Theory, and Tests

J. OF MONEY, CREDIT AND BANKING, Vol. 29 No. 4, Part 1, November 1997

31 Pages Posted: 8 Jul 1997

See all articles by Richard L. Shockley

Richard L. Shockley

Indiana University - Kelley School of Business - Department of Finance

Anjan V. Thakor

Washington University in St. Louis - John M. Olin Business School; Financial Theory Group; European Corporate Governance Institute (ECGI); Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Abstract

Over 80% of all commercial bank lending to corporations in the U.S. is done via bank loan commitments. Yet we have little empirical knowledge of loan commitment contracts. In this paper we describe the rich contractual structure of bank loan commitments based on data pertaining to over 2,500 contracts. We then develop a model which demonstrates that the observed complex structure of bank loan commitment contracts (which typically include multiple fee structures, borrower-specific contracting variables, and the standard "material adverse change clause") is important when the bank faces borrower adverse selection and moral hazard problems. Finally, we verify the robustness of our model by confronting its additional testable predictions with the data.

JEL Classification: G21

Suggested Citation

Shockley, Richard L. and Thakor, Anjan V., Bank Loan Commitment Contracts: Data, Theory, and Tests. J. OF MONEY, CREDIT AND BANKING, Vol. 29 No. 4, Part 1, November 1997, Available at SSRN: https://ssrn.com/abstract=8409 or http://dx.doi.org/10.2139/ssrn.8409

Richard L. Shockley

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
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812-855-9404 (Phone)
812-855-5875 (Fax)

Anjan V. Thakor (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Financial Theory Group ( email )

United States

European Corporate Governance Institute (ECGI) ( email )

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1000 Brussels
Belgium

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street, E62-618
Cambridge, MA 02142
United States

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