Poor loan quality is often attributed to loan officers exercising poor judgment. A potential solution is to base loans on hard information alone. However, we find other consequences of bypassing discretion stemming from loan officer incentives and limits of hard information verifiability. Using...

We examine the impact of managerial optimism on the inclusion of performance-pricing provisions in syndicated loan contracts (PSD). Optimistic managers may view PSD as a relatively cheap form of financing given their upwardly biased expectations about the firm’s future cash flow. Indeed,...

Practitioners frequently price credit instruments using real world quantities (PD, EL) and adding a risk premium. This paper analyzes these credit risk premia implied by structural models of default. We first analyze a Merton framework and find that i) credit risk premia constitute a significant...

We propose a new approach to estimate the equity premium using CDS spreads and structural models of default. Our estimates yield equity premia of 6.50% for the U.S., 5.44% for Europe and 6.21% for Asia based on 5-year CDS spreads from 2003-2007. Due to some conservative assumptions these...

We argue that contingent convertible capital (CoCo-Bonds) might have perverse risk-taking incentives for banks (asset substitution problem) and discourage them from investing in positive NPV projects and issuing new equity in times of crisis (debt overhang problem). Whenever the conversion price...

More than 80% of US syndicated loans contain at least one fee type and contracts typically specify a menu of spread and different types of fees. We test the predictions of existing theories about the main purposes of fees and provide supporting evidence that: (1) fees are used to Price options...