Major Government Customers and Loan Contract Terms

51 Pages Posted: 16 Nov 2016 Last revised: 7 Jan 2021

See all articles by Daniel A. Cohen

Daniel A. Cohen

Texas A&M University College Station

Bin Li

University of Houston - Department of Accountancy & Taxation

Ningzhong Li

University of Texas at Dallas

Yun Lou

Singapore Management University - School of Accountancy

Date Written: September 29, 2020

Abstract

We examine the relation between the presence of U.S. government as a major customer and a supplier firm’s loan contract terms, using major corporate customers as a benchmark. We find that firms with major government customers are associated with a lower number of covenants and a lower likelihood of having performance pricing provisions in their loan contracts. In contrast, we do not find such associations for firms with major corporate customers. Further, we find no evidence that the existence of major government customers is related to the supplier firm’s loan spread, security, or maturity. We conjecture that lenders benefit from the stricter monitoring activities of the government as a major customer and thus use fewer covenants and performance pricing provisions when lending to firms with major government customers than when lending to those with major corporate customers. We provide evidence consistent with this conjecture.

Keywords: major government customers; major corporate customers; loan contract terms.

JEL Classification: G30; H57; L14;

Suggested Citation

Cohen, Daniel A. and Li, Bin and Li, Ningzhong and Lou, Yun, Major Government Customers and Loan Contract Terms (September 29, 2020). HEC Paris Research Paper No. ACC-2016-1179, Singapore Management University School of Accountancy Research Paper No. 2021-122, Available at SSRN: https://ssrn.com/abstract=2868761 or http://dx.doi.org/10.2139/ssrn.2868761

Daniel A. Cohen

Texas A&M University College Station

Department of Accounting
College Station, TX 77843
United States

Bin Li

University of Houston - Department of Accountancy & Taxation ( email )

Bauer College of Business
4800 Calhoun Road
Houston, TX 77204
United States

Ningzhong Li

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Yun Lou (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

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