Managerial Ability and Bank-Loan Pricing

Forthcoming, Journal of Business Finance and Accounting

Rotman School of Management Working Paper No. 3001882

46 Pages Posted: 19 Jul 2017

See all articles by Gus De Franco

Gus De Franco

Tulane University - A.B. Freeman School of Business

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Haihao Lu

University of Waterloo

Multiple version iconThere are 3 versions of this paper

Date Written: July 13, 2017

Abstract

This paper examines the impact of borrowers’ managerial ability on lenders’ bank-loan pricing and the channels through which managerial ability affects bank-loan pricing. Using a large sample of U.S. bank loans, we provide evidence that higher managerial ability is associated with lower bank-loan prices. This effect is stronger in firms with high information risk, suggesting that an important channel for managerial ability to affect bank-loan pricing is through improved financial disclosure to mitigate information asymmetry. The relation is also stronger for firms with weak business fundamentals, implying that another channel is through improved business performance. Of these two mechanisms, path analysis suggests that the business-fundamentals mechanism is the more important channel through which managerial ability affects bank-loan pricing.

Keywords: Managerial ability, bank-loan pricing, fundamentals, disclosure, path analysis

JEL Classification: G30, G31, G32, G34, M10, M40, M41

Suggested Citation

De Franco, Gus and Hope, Ole-Kristian and Lu, Haihao, Managerial Ability and Bank-Loan Pricing (July 13, 2017). Forthcoming, Journal of Business Finance and Accounting, Rotman School of Management Working Paper No. 3001882, Available at SSRN: https://ssrn.com/abstract=3001882

Gus De Franco

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Haihao Lu

University of Waterloo ( email )

Toronto, ON
Canada

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