Title：The use of forward-looking private information in bank-loan pricing: the role of credibility

Speaker: Yong Zhang, Associate Professor, Hong Kong Polytechnic University

Time：10:00-11:30, Sep 30th, 2026 (Wednesday)

Venue：Room 1008, Mingde Business Building (Zhongguancun Campus)

Language：Chinese & English

ABSTRACT:

We examine the use of borrower-supplied forward-looking private information in bank-loan pricing, with a special emphasis on the verification mechanisms (Nikolaev 2017) that could be employed by lenders to assess the credibility of private information. The private information we focus on is internal performance targets, which are a central component of corporate budgets that serve the essential function of coordinating firm-wide activities and incentivizing managers. Direct (but ex post) observation of performance targets, which is made possible by the 2006 SEC disclosure mandate, makes it possible to examine the effect of performance targets on loan pricing. More importantly, it allows for examinations of mechanisms that lenders may use to verify the credibility of borrower-supplied private information. Consistent with lenders on average considering borrower-supplied performance target to be credible information, banks charge incrementally lower spreads on borrowers with higher performance targets after controlling for firm characteristics and realized performance. Performance targets have a stronger effect on loan spreads when lenders have complementary mechanisms to verify the reliability of performance target information. Such mechanisms include existing lending relationships with borrowers’ industries peers, customers, or suppliers, prior lending relationships with borrowers, and access to employees as granted by inspection rights provision in existing lending contracts. The effect of performance targets on loan spreads is also more pronounced when features of performance targets suggest that they contain more accurate information about future performance: when they are associated with narrower performance ranges, when they have higher historical accuracy, or when the board is more independent from the CEO. Last, the effect of performance targets on loan spreads is more pronounced when borrowers have higher information asymmetry or lower financial reporting quality, or when borrowers do not provide management earnings guidance. Our findings support the critical role of credibility and verification mechanisms for the use of forward-looking private information in bank-loan pricing.

SHORT BIOGRAPHY:

Dr. Yong Zhang is an associate professor of accounting at the Hong Kong Polytechnic University. He has broad research interests including Corporate Governance, Financial Regulations, Executive Compensation, Insider Trading, and the role of media and social media in financial markets. His research has been published in leading research journals in both accounting and finance (Journal of Accounting and Economics, Journal of Accounting Research, Management Science, Contemporary Accounting Research, Review of Accounting Studies, Journal of Banking and Finance, Journal of Accounting Auditing and Finance, and Journal of Accounting and Public Policy). His work has been featured in Harvard Law School Forum on Corporate Governance and Financial Regulation and Columbia Law School's Blog on Corporations and the Capital Markets and presented in conferences such as NBER and AFA.