Loan Term Interdependences and Information Asymmetries

This study examines whether loan terms are jointly determined and if information asymmetries’ effects on them across revolving and term loans. A simultaneous equation model is applied for revolving and term loans made by US commercial banks to US corporate borrowers from 1987 to 2009. The findings suggest that loan terms are jointly determined and that information asymmetries’ effects on them differently across loan types. The research contributes literature in several ways. It first provides evidence the determinants of largest set of loan terms in a simultaneous context therefore may better reflect reality. This is also the first examines the effect of information asymmetries on loan terms, especially on covenants and loan size, in such a context. Lastly, this is the first study that distinguishes revolving and term loans to inspect these issues.