Politically Conservative CEOs and Bank Loan Contracting
Posted: 26 May 2012
Date Written: May 25, 2012
Financial contracts are strongly influenced by the perception that transacting parties have of each other. Hence, if contracting counterparties such as banks perceive that there is a difference in the likelihood that CEOs with conservative and liberal political orientation will discharge their loan obligations as contracted then banks might offer different loan terms to these CEOs. We examine whether firms with politically conservative CEOs obtain different bank loan contract terms than firms with non-conservative CEOs. We find that firms with conservative CEOs pay lower spreads and upfront fees, have fewer financial, general, and total covenants, and are less likely to have to pledge collateral. These effects are stronger when the CEO is both politically conservative and overconfident, suggesting that there is a bright side to overconfidence. This effect is distinct from, but magnified by, firm political orientation.
Keywords: Political values, political conservatism, Republican managers, bank loan cost, loan spreads, cost of debt, non-price loan terms, overconfidence, trustworthiness
JEL Classification: G21, G32
Suggested Citation: Suggested Citation