Published in:Tuck School of Business Working Paper ; No. 1964843
Extent:
1 Online-Ressource (48 p)
Language:
English
DOI:
10.2139/ssrn.1964843
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments September 6, 2019 erstellt
Description:
Corporate term loans typically include a penalty-free prepayment option. In a model where borrowers strategically prepay, we show that high prepayment risk can trigger credit rationing by the bank. However, an upfront fee, which allows the bank to lower the loan spread and therefore the prepayment risk, restores an equilibrium with funding. Large-sample tests reveal that upfront fees are positively associated with proxies for loan prepayment risk and lower for performance-sensitive debt, as the theory predicts. Higher prepayment risk caused by exogenous merger activity in the industry of the borrower also increases upfront fees as predicted