Managerial Ability and Bank-Loan Pricing
Forthcoming, Journal of Business Finance and Accounting
46 Pages Posted: 19 Jul 2017
Date Written: July 13, 2017
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: Suggested Citation