Managerial Effect or Firm Effect: Evidence from Private Debt Market
40 Pages Posted: 10 Dec 2013 Last revised: 23 Sep 2015
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: Suggested Citation