This paper investigates whether the reputation of non-CEO inside director matters in bank loan contracting. We posit that reputable inside directors (RIDs) can improve the quality of borrowers’ financial reporting and reduce agency risk in loan contracting. Based on a regression analysis of 5104 loan facilities during 1999–2007, we find that borrowers with RIDs enjoy lower loan interest rates and fewer restrictive covenants, and are less likely to have loans secured by collateral, than borrowers without RIDs. Our empirical results also show that RIDs help to obtain favorable loan terms mainly through alleviating ex-ante information asymmetry between borrowers and lenders. Further categorizing RIDs into CFO directors and other inside directors, we find that the effects of RIDs on loan spread and collateral requirements are significant for both CFO directors and other inside directors, while other inside directors have a more significant impact on financial covenants than CFO directors. Our findings are robust to controlling for RID characteristics and independent director reputation, and addressing the endogeneity concerns of RIDs, as well as the joint determination of various loan contracting terms.

In this study, we show that a firm's use of special purpose entities (SPEs) is associated with unfavorable loan contract terms, including higher loan rates, collateral requirements, and restrictive covenants. Further analyses suggest that the association between the use of SPEs and unfavorable loan contract terms is primarily due to the increase in the information risk faced by lenders, as firm managers can easily use SPEs to manipulate earnings and hide losses. Specifically, we find that the use of SPEs has a more pronounced effect on increasing the cost of loans and causing more stringent non-price loan terms when managers have a stronger incentive to manipulate earnings and when banks have less knowledge about the SPE sponsor firms due to the lack of prior lending relationship. In addition, we find that the use of SPEs is associated with a greater likelihood of accounting restatements and greater information asymmetry between inside managers and outside capital suppliers.

Using a sample of 3725 loan facility–years for supplier firms that have financial data on their major customers during the period 1995–2011, this study investigates whether the earnings performance of major customers has effect on the price and nonprice terms of loans to the supplier firms. We find that various contracting terms are more favorable for loans to supplier firms whose major customers have higher return on assets (ROA). More importantly, we find that the effect of major customers’ earning performance on loan contracting terms is weaker for the borrowers with prior loan relationships with banks, while it is stronger for the borrowers that are highly dependent on their major customers. Our results suggest that banks take into account major customers’ earnings performance when contracting with their supplier firms, and the informativeness of customer earnings varies with the nature and strength of the customer–supplier relationships.