Soft Information in Loan Agreements

Zahn Bozanic, Lin Cheng, Tzachi Zach

Research output: Contribution to journalArticlepeer-review

11 Scopus citations


In this study, we seek to understand whether soft information conveyed by contracting language found in private loan agreements is informative regarding borrower risk. We proxy for credit-risk-relevant soft information using Loughran and McDonald’s uncertainty mea-sure. We first examine initial contract terms and find that, incremental to traditional sum-mary measures of credit risk, increased contractual uncertainty is associated with higher initial loan spreads and a greater likelihood of using dynamic and performance-pricing cove-nants. We then turn to examine realized credit risk over the life of the loan and find that increased uncertainty is associated with a higher likelihood of future loan downgrades and loan amendments. We corroborate our results on the risk relevance of soft information by showing that the bid-ask spreads of loans trading on the secondary loan market are increas-ing in uncertainty. Overall, the evidence we provide is consistent with embedded linguistic cues in loan agreements publicly revealing the credit risk assessments of privately informed lenders.

Original languageEnglish (US)
Pages (from-to)40-71
Number of pages32
JournalJournal of Accounting, Auditing and Finance
Issue number1
StatePublished - Jan 2018


  • contract design
  • credit risk
  • loan contracts
  • private information
  • textual analysis

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)


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