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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 measure. We first examine initial contract terms and find that, incremental to traditional summary measures of credit risk, increased contractual uncertainty is associated with higher initial loan spreads and a greater likelihood of using dynamic and performance-pricing covenants. 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 increasing 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.

This study examines the effect of the type of accounting service (audit, review, compilation, and no report), the accounting firm providing the service, the capital structure of the borrower, and the bank size on loan officers' lending decisions. The findings show the level of service had an impact on the amount of the loan, but not on the interest rate awarded nor on the decision whether or not to grant a line of credit. The accounting firm (large international with good reputation versus local with unknown reputation) providing the accounting service, however, did not significantly affect the bank loan decision. Capital structure of the borrower had a significant impact on the decision to grant a line of credit, the loan size, and the interest rate. In addition, the loan size and interest rate were significantly influenced by the size of the bank granting the loan.