Managerial Effect or Firm Effect: Evidence from Private Debt Market

40 Pages Posted: 10 Dec 2013 Last revised: 23 Sep 2015

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Yun Zhu

St. John's University - Department of Economics and Finance

Date Written: September 20, 2015

Abstract

It is the common understanding that private lenders evaluate and price the debt contract based on the credit rating, default risk and firm characteristics of the borrowing firms. This paper takes a different angel and investigates the extent to which the loan contract incorporates and reflects the managerial effect in its pricing and non-pricing terms. We find that managerial effect is one critical factor that explains a large part of the variation in loan contract terms, and for a number of loan attributes, it explains more variation than firm fixed effect. We provide additional support by showing that banks “follow” managers’ job changes and offer loan contracts with preferential terms to their new firms.

Keywords: Managerial Effect, Firm Effect, Cost of Capital, Bank Loan

JEL Classification: G21, G30, G32, J24

Suggested Citation

Francis, Bill and Hasan, Iftekhar and Zhu, Yun, Managerial Effect or Firm Effect: Evidence from Private Debt Market (September 20, 2015). Bank of Finland Research Discussion Paper No. 29/2013, Available at SSRN: https://ssrn.com/abstract=2365161 or http://dx.doi.org/10.2139/ssrn.2365161

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Yun Zhu

St. John's University - Department of Economics and Finance ( email )

Jamaica, NY 11439
United States

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