Price Discipline for Non-Price Loan Terms

Abstract

A standard model of capital markets contracting argues that issuers select non-price contract terms to optimize their value relative to the price they imagine investors will charge for it. To assess this model’s ability to explain term selection in the syndicated loan market, we study the secondary market reaction to events—the appearance and proliferation of a new type of restructuring transaction known as an uptier—that spurred quick changes in the contract terms that parties negotiated in the primary market. We find only weak (and fragile) evidence of a significant price effect for loans traded on the secondary market. The imprecision of our results reveals a challenge for scholars of contracting who might rely on an event-study research design. The fact that market participants cannot obtain a reliable indication of “price” when there is a substantial shock to the understanding of a meaningful non-price term also casts doubt on the descriptive power of the price-discipline mechanism for all but the most important features of a loan contract.

Practicalities
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