The Determinants of Contract Terms in BankRevolving Credit Agreements

Abstract

The paper examines the determinats of contract terms onbank revolving credit agreements (revolvers) ofmedium/large publicly traded companies. We model theduration (maturity), secured status, and pricingdecisions within a simultaneous decision framework,thereby overcoming the biased and inconsistentestimates in prior single equations studies of debtcontract terms. We find strong interrelationashipsbetween contract terms with significantbi-directorinal relationships between duration andsecure status and between the all-in-spread andcommitment fees and aunidirectional relationshipfrom both duration and secured status toall-in-spread. We also illustrate how several singleequation studies of contract terms draw incorrectconclusions because of their (inappropriate)assumption that other contract therms and leveragewere exogenous. Finally, our results support thehypothesis that the setting of contract terms playsand important role in alleviating contractingproblems.