How Do Banks Facilitate Corporate Innovation? Evidence from Bank CEO Optimism
62 Pages Posted: 25 Jan 2017 Last revised: 17 Jul 2017
Date Written: January 25, 2017
We study whether bank CEO optimism (optimistic bank) plays a role in technological progress. We find that optimistic banks lend more to smaller/riskier firms and charge higher loan spreads to compensate for the higher risk exposures. More interestingly, these optimistic banks prefer lending to risky firms that engage in more corporate innovation. Our results show that, compared with other borrowers, these risky borrowers spend more on R&D after obtaining loans from optimistic banks. We also find that these firms yield higher innovation output and achieve greater market valuation. Overall, our findings suggest bank CEO optimism helps to facilitate corporate innovation.
Keywords: CEO overconfidence, bank lending, R&D, patents and citations, Tobin’s q
JEL Classification: G21, G31, G32
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