Working paper/research report

Authors list: Bannier, Christina E.; Wiemann, M.

Publication year: 2014

DOI Link: https://doi.org/10.2139/ssrn.2507707

Title of series: CFS Working Paper Series

Number in series: 476

Abstract: 

This paper studies the use of performance pricing (PP) provisions in debt contracts and compares accounting-based with rating-based pricing designs. We find that rating-based provisions are used by volatile-growth borrowers and allow for stronger spread increases over the credit period. Accounting-based provisions are employed by opaque-growth borrowers and stipulate stronger spread reductions. Further, a higher spread-increase potential in rating-based contracts lowers the spread at the loan’s inception and improves the borrower’s performance later on. In contrast, a higher spread-decrease potential in accounting-based contracts lowers the initial spread and raises the borrower’s leverage afterwards. The evidence indicates that rating-based contracts are indeed employed for different reasons than accounting-based contracts: the former to signal a borrower’s quality, the latter to mitigate investment inefficiencies.

Harvard Citation style: Bannier, C. and Wiemann, M. (2014) Performance-Sensitive Debt – The Intertwined Effects of Performance Measurement and Pricing Grid Asymmetry. (CFS Working Paper Series, 476). Frankfurt am Main: Center for Financial Studies. https://doi.org/10.2139/ssrn.2507707

APA Citation style: Bannier, C., & Wiemann, M. (2014). Performance-Sensitive Debt – The Intertwined Effects of Performance Measurement and Pricing Grid Asymmetry. (CFS Working Paper Series, 476). Center for Financial Studies. https://doi.org/10.2139/ssrn.2507707