Foreign lenders’ adoption of performance pricing provisions in syndicated loans

We examine foreign lenders’ use of performance pricing provisions (PPPs) in syndicated loan contracts. First, we find that foreign lenders, as a result of both higher information asymmetry and greater renegotiation costs than their domestic counterparts, adopt PPPs instead of tight covenants in their contracts. Second, foreign lenders have a greater preference for PPPs based on credit ratings as opposed to those based on accounting ratios than their domestic counterparts. This is consistent with informationally disadvantaged foreign lenders valuing rating-based PPPs’ signaling role, with the role of accounting-based PPPs addressing the hold-up problem being less relevant to them. In addition, the above effects mainly exist when foreign lenders serve as participants rather than lead arrangers in the syndicate. Overall, our findings establish the important role played by rating-based PPPs in addressing foreign participant lenders’ information asymmetry and thereby promoting cross-border lending.