Bank Loan Commitment Contracts: Data, Theory, and Tests

Over 80 per cent of all commercial bank lending to corporations in the U.S. is done via bank loan commitments. Yet the authors have little empirical knowledge of loan commitment contracts. In this paper they describe the rich contractual structure of bank loan commitments based on data pertaining to over 2,500 contracts. The authors then develop a model which demonstrates that the observed complex structure of bank loan commitment contracts (which typically include multiple fee structures borrower-specific contracting variables, and the standard 'material adverse change clause') is important when the bank faces borrower adverse selection and moral hazard problems. Finally, the authors verify the robustness of their model by confronting its additional testable predictions with the data.