Conferences - Seminars
Upfront Fees and Prepayment Risk in Bank Loans
By Karin THORBURN, Norwegian School of Economics - NHH
We present new, large-sample evidence on commercial and industrial loans, which allow borrowers to prepay without penalty. In a simple theoretical framework, after receiving a private non-contractible signal, ex-post high-quality firms strategically refinance. We show that the prepayment option may trigger credit rationing, which an upfront fee can resolve. Empirical tests show that upfront fees increase with prepayment risk, consistent with the model. Moreover, fees are higher after an exogenous shock to prepayment risk, instrumented with industry merger activity. Upfront fees are also lower for performance-sensitive debt and credit lines, as predicted.
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