Confidentiality in loan credit agreements
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 18 June 2021
Issue publication date: 8 March 2022
Abstract
Purpose
This study has two primary objectives. First, it analyzes the information content of confidentiality strictness in corporate loan credit agreements. Second, it examines how confidentiality strictness impacts covenant design, lending syndicate structure and loan pricing.
Design/methodology/approach
Using a sample of 6,327 loan credit agreements originated by US public firms in the period of 1996–2017, this study measures the confidentiality strictness in loan contracts using textual analyses that capture the appearance of confidentiality-related words and the length of confidentiality provision. All regressions include relevant loan characteristics, firm-specific accounting variables, industry and year fixed effects. To address the endogeneity concern, the paper uses borrowing firms' rival cash holdings and R&D expenditures to instrument for confidentiality strictness in two-staged least square regressions.
Findings
Borrowers which have higher R&D and operate in more competitive product markets have tighter confidentiality policies. Furthermore, this study reveals that confidentiality strictness is negatively associated with the imposition of financial covenants, especially performance covenants. Loan contracts for borrowers with stricter confidentiality on average have more relaxed covenant intensity, measured by the number of covenants. The study also shows that stricter confidentiality attracts finance companies, which have strong expertise in product markets of their parent firms, into the lending syndicate. However, confidentiality-conscious borrowers with higher degree of information asymmetry are subject to higher loan spreads.
Originality/value
This study provides the first examination of confidentiality policies in loan contracts and supports the idea that loan provisions are not simply made of “boilerplate” language. The results suggest that, for confidentiality-sensitive borrowers, the greater exposure to product market competition helps control managerial slack and substitute monitoring from financial markets.
Keywords
Acknowledgements
Initial work on this study was completed when one of the authors, Ca Nguyen, was a Ph.D. student at the University of Texas at San Antonio. The authors have no conflict of interest and there has been no significant financial support for this work that could have influenced its outcome.
Citation
Nguyen, C. and Pacheco, A. (2022), "Confidentiality in loan credit agreements", International Journal of Managerial Finance, Vol. 18 No. 2, pp. 336-364. https://doi.org/10.1108/IJMF-10-2020-0532
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited