Do Better Managers Get Better Loan Contracts?
67 Pages Posted: 14 Jun 2016
Date Written: June 10, 2016
This paper examines the impact of managerial ability on bank loan contracting. We find that firms with higher ability managers obtain more favorable loan contract terms, such as lower loan spreads, less stringent covenants, and longer term maturity. 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 managerial ability is positively related to firm future performance and negatively related to firm future default risk, indicating that managerial ability affects bank loan contracting via both valuation and information effects.
Keywords: Managerial ability, Bank loan contracting, Default risk, Information opacity, Agency costs of debt
JEL Classification: G14, G21, M41
Suggested Citation: Suggested Citation