Changes in Spreads Based on the Adoption of Performance Pricing

• In Event: Public Interest 2

Abstract

We investigate the dynamics of interest loan spreads for performance sensitive debt (PSD) over time, related to both fixed loans and spreads for different categories of borrowers. Early studies identified lower spreads for PSD versus other fixed rate loans. Theories for the relative PSD rates include the transfer of credit risk from lender to borrower, lower contracting costs, macroeconomic conditions, and competitive pricing to gain PSD borrowers. Previous research has not examined the distribution of PSD benefits, thus their role in either ameliorating or exacerbating the uneven access to credit in the economy is unknown. Using a sample of loans from DealScan, we performed univariate and multivariate analysis to identify explanatory factors. Our findings indicate that large firms have accrued most of the benefits of this loan innovation, even after controlling for variables associated with creditworthiness.

Authors

• Janet Lynn Souza, University of Memphis

• Frances Fabian, University of Memphis