Performance-sensitive debt: The intertwined effects of performance measurement and pricing grid asymmetry

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper Series ; No. 476

Classification and Topics

• Classification: Wirtschaft ; Corporate Finance and Governance: General ; Accounting and Auditing: General
• Subject: Performance pricing ; performance-sensitive debt ; accounting data ; credit ratings ; underinvestment ; collateral

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bannier, Christina E. ; Wiemann, Markus
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2014

Further information

• Handle: http://hdl.handle.net/10419/102699
• Last update: 10.03.2025, 11:44 AM CET