Earnings performance of major customers and bank loan contracting with suppliers |
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| Institution: | 1. Department of Banking and Finance, National Chi Nan University, No. 1, University Road, Puli, Nantou County 54561, Taiwan;2. Department of International Business, National Taiwan University, No. 1, Sec. 4, Roosevelt Rd., Taipei City 106, Taiwan\n;3. Department of Finance, Asia University, 500, Lioufeng Rd., Wufeng, Taichung 41354, Taiwan;1. Sawyer Business School, Suffolk University, Boston, MA 02108, United States;2. Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, 639798, Singapore;3. Australian School of Business, University of New South Wales, Sydney, NSW 2052, Australia;4. Sogang Business School, Sogang University, Seoul, 121-742, South Korea;1. School of Acccounting and Finance, University of Waterloo, 200 University Avenue West, Waterloo, ON, Canada N2L 3G1;2. School of Business, Hong Kong Baptist University, 34 Renfrew Road, Kowloon Tong, Kowloon, Hong Kong;3. College of Business, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon, Hong Kong;1. The University of Texas at San Antonio, College of Business, One UTSA Circle, San Antonio, TX 78249, United States;2. Trinity University, School of Business, One Trinity Place, San Antonio, TX 78212, United States |
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| Abstract: | 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. |
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| Keywords: | Earnings performance Supply chain Credit risk Loan contracting |
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