Politically Conservative CEOs and Bank Loan Contracting

Posted: 26 May 2012

See all articles by Bill B. Francis

Bill B. Francis

University of South Florida - College of Business Administration

Delroy M. Hunter

University of South Florida

Dongnyoung Kim

California State University San Marcos

Sattar Mansi

Virginia Polytechnic Institute & State University

Date Written: May 25, 2012

Abstract

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

Francis, Bill B. and Hunter, Delroy M. and Kim, Dongnyoung and Mansi, Sattar, Politically Conservative CEOs and Bank Loan Contracting (May 25, 2012). Available at SSRN: https://ssrn.com/abstract=2066915 or http://dx.doi.org/10.2139/ssrn.2066915

Bill B. Francis

University of South Florida - College of Business Administration ( email )

4202 E. Fowler Avenue, BSN 3403
Dept. of Finance
Tampa, FL 33620-5500
United States
813-974-6300 (Phone)
813-974-3030 (Fax)

HOME PAGE: http://www.coba.usf.edu/departments/finance/facult

Delroy M. Hunter (Contact Author)

University of South Florida ( email )

Dept of Finance, Muma College of Business
4202 E. Fowler Ave, BSN3403
Tampa, FL 33620
United States
(813) 843-2085 (Phone)
(813) 974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/hunter-delroy.aspx

Dongnyoung Kim

California State University San Marcos ( email )

United States
7607504248 (Phone)

Sattar Mansi

Virginia Polytechnic Institute & State University ( email )

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