Do Better Managers Get Better Loan Contracts?
68 Pages Posted: 14 Jun 2016 Last revised: 24 Sep 2023
Date Written: June 10, 2016
Abstract
This paper examines the impact of managerial ability on bank loan contracting. We find that firms with more-able managers obtain more favorable loan contract terms, including lower loan spreads, fewer covenants, and more short-term maturities. Furthermore, the negative relation between managerial ability and loan spread is concentrated in firms with higher information asymmetry, higher default risk, or lower agency costs of debt. Finally, we find that firms with more-able managers are more likely to choose public bonds over bank loans. Our paper provides novel evidence that banks do consider the quality of managers when designing bank loan contracts.
Keywords: Managerial ability, Bank loan contracting, Default risk, Information opacity, Agency costs of debt
JEL Classification: G14, G21, M41
Suggested Citation: Suggested Citation