Does Bank Monitoring Influence Loan Contract Terms?

We examine the impact of bank monitoring on loan contract terms using a new proxy for monitoring ability based on the labor input into monitoring. We show in out-of-sample tests that the proxy is a statistically and economically significant determinant of future loan quality. Accounting for clusteri...

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Bibliographic Details
Published in:Journal of financial services research 2006-10, Vol.30 (2), p.177-198
Main Authors: Esho, Neil, Coleman, Anthony, Sharpe, Ian
Format: Article
Language:English
Subjects:
Automation
Bank loans
Bank monitoring
Bank operations
Banking
Banking industry
Banks
Contracts
Financial research
Hypotheses
Liquidity
Loan losses
loan maturity
loan pricing
Loans
Monitoring
Participating loans
Price formation
Reputations
Securities markets
Studies
Term structure
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Summary:We examine the impact of bank monitoring on loan contract terms using a new proxy for monitoring ability based on the labor input into monitoring. We show in out-of-sample tests that the proxy is a statistically and economically significant determinant of future loan quality. Accounting for clustering of observations by lead bank, and controlling for borrower characteristics, contract features and bank risk, we find a statistically significant direct relationship between monitoring ability and loan maturity and a statistically and economically significant direct relationship between monitoring ability and the loan yield spread. The relationships are particularly strong for working capital loans. [PUBLICATION ABSTRACT]
ISSN:0920-8550
1573-0735
DOI:10.1007/s10693-006-0017-5