Cost stickiness and bank loan contracting

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Article number100645
Journal / PublicationAdvances in Accounting
Volume61
Online published8 Feb 2023
Publication statusPublished - Jun 2023

Abstract

This study examines whether and, if so, how borrowers' asymmetric cost behavior (i.e., cost stickiness) is factored into the price and non-price terms of bank loan contracts. We provide strong and reliable evidence that ex-ante, the loan spread increases with cost stickiness after controlling for other known determinants of loan contract terms. Moreover, we find that the effect is more pronounced for borrowers with higher default risk and higher information risk. This is consistent with borrowers' asymmetric cost behavior increasing lenders' uncertainty about the liquidation value of assets, and hence, lenders need to be compensated ex-ante. Additionally, we conjecture that higher cost stickiness may increase the need for ex-post monitoring. Consistent with this conjecture, we find some evidence that lenders impose tighter non-price terms on firms with stickier costs. This study integrates cost stickiness research with the banking literature by showing that banks incorporate borrowers' asymmetric cost behavior into loan contracting terms. © 2023 Elsevier Ltd

Research Area(s)

  • Bank loan contracting, Cost stickiness, Default risk, Information risk, Loan spread

Citation Format(s)

Cost stickiness and bank loan contracting. / Kim, Jeong-Bon; Zhou, Jie.
In: Advances in Accounting, Vol. 61, 100645, 06.2023.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review