Bank loan commitment contracts: Data, theory, and tests

Over 80 percent of all commercial bank lending to corporations in the United States is done via bank loan commitments. Yet we have little empirical knowledge of loan commitment contracts. In this paper we describe the rich contractual structure of bank loan commitments based on data pertaining to over 2,500 contracts. We then develop a model that demonstrates that the observed complex structure of bank loan commitment contracts (which typically include multiple fee structures, borrower-specific contracting variables, and the standard material adverse chance clause") is important when the bank faces borrower adverse selection and moral hazard problems. Finally, we verify the robustness of our model by confronting its additional testable predictions with the data.