Loan-commitment borrowing and performance-sensitive debt

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• 作者：Sudipto Sarkar ; Chuanqian Zhang
• 关键词：Private corporate debt ; Loan commitment ; Performance ; sensitive debt
• 刊名：Review of Quantitative Finance and Accounting
• 出版年：2016
• 出版时间：November 2016
• 年：2016
• 卷：47
• 期：4
• 页码：973-986
• 全文大小：445 KB
• 刊物类别：Business and Economics
• 刊物主题：Economics
  Finance and Banking
  Accounting and Auditing
  Econometrics
  Operation Research and Decision Theory
  
• 出版者：Springer Netherlands
• ISSN：1573-7179
• 卷排序：47

文摘

This paper examines a firm’s investment/financing decision when it uses loan-commitment-type debt with performance-sensitivity features. This analysis is of interest because most corporate borrowing today is by means of private debt, which tends to be of the loan-commitment type as well as contain performance-sensitivity provisions. We show that, except for the case of low leverage ratio, performance-sensitive debt makes shareholders better off relative to fixed-coupon debt. In particular, when the leverage ratio is chosen optimally, performance-sensitive debt dominates fixed-coupon debt and the resulting addition to shareholder wealth can be economically significant for reasonable parameter values. Therefore, it is not surprising that performance-sensitive debt has become so popular in the private debt market. The magnitude of shareholder wealth created by using performance-sensitive debt rather than fixed-coupon debt is an increasing function of earnings growth rate and tax rate, and a decreasing function of interest rate, earnings volatility and bankruptcy cost. Therefore, performance-sensitive debt financing is more likely to be used when earnings growth rate and tax rate are high, and interest rate, earnings volatility and bankruptcy cost are low.