Performance-sensitive debt - the intertwined effects of performance measurement and pricing grid asymmetry : [This version: September 8, 2014]
- 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.
| Author: | Christina E. BannierGND, Markus Wiemann |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-351088 |
| URL: | http://ssrn.com/abstract=2507707 |
| DOI: | https://doi.org/10.2139/ssrn.2507707 |
| Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 476 |
| Series (Serial Number): | CFS working paper series (476) |
| Publisher: | Center for Financial Studies |
| Place of publication: | Frankfurt, M. |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2014 |
| Year of first Publication: | 2014 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2014/10/20 |
| Tag: | accounting data; collateral; credit ratings; performance pricing; performance-sensitive debt; underinvestment |
| Issue: | September 8, 2014 |
| Page Number: | 44 |
| HeBIS-PPN: | 351156828 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
