Earnings performance of major customers and bank loan contracting with suppliers
Document Type
Journal article
Source Publication
Journal of Banking and Finance
Publication Date
10-2015
Volume
59
First Page
384
Last Page
398
Publisher
Elsevier BV
Keywords
Earnings performance, Supply chain, Credit risk, Loan contracting
Abstract
Using a sample of 3725 loan facility–years for supplier firms that have financial data on their major customers during the period 1995–2011, this study investigates whether the earnings performance of major customers has effect on the price and nonprice terms of loans to the supplier firms. We find that various contracting terms are more favorable for loans to supplier firms whose major customers have higher return on assets (ROA). More importantly, we find that the effect of major customers’ earning performance on loan contracting terms is weaker for the borrowers with prior loan relationships with banks, while it is stronger for the borrowers that are highly dependent on their major customers. Our results suggest that banks take into account major customers’ earnings performance when contracting with their supplier firms, and the informativeness of customer earnings varies with the nature and strength of the customer–supplier relationships.
DOI
10.1016/j.jbankfin.2015.06.020
Print ISSN
03784266
E-ISSN
18726372
Funding Information
Partial financial support for this research from the City University of Hong Kong.
Publisher Statement
Copyright © 2015 Elsevier B.V. All rights reserved. Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Kim, J-B., Song, B. Y. & Zhang, Y. (2015). Earnings performance of major customers and bank loan contracting.Journal of Banking & Finance, 59, 384-398. doi: 10.1016/j.jbankfin.2015.06.020