Managerial Effect or Firm Effect: Evidence from the Private Debt Market

35 Pages Posted: 20 May 2020

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Yun Zhu

St. John's University - Peter J. Tobin College of Business

Date Written: February 2020

Abstract

This paper provides evidence that the managerial effect is a key determinant of firms’ cost of capital, in the context of private debt contracting. Applying the novel empirical method developed by an earlier study to a large sample that tracks the job movement of top managers, we find that the managerial effect is a critical and significant factor that explains a large part of the variation in loan contract terms more accurately than firm fixed effects. Additional evidence shows that banks “follow” managers when they change jobs and offer loan contracts with preferential terms to their new firms.

Keywords: firm fixed effect, loan contract, managerial effect

JEL Classification: G21, G31, J24

Suggested Citation

Francis, Bill and Hasan, Iftekhar and Zhu, Yun, Managerial Effect or Firm Effect: Evidence from the Private Debt Market (February 2020). Financial Review, Vol. 55, Issue 1, pp. 25-59, 2020, Available at SSRN: https://ssrn.com/abstract=3601148 or http://dx.doi.org/10.1111/fire.12196

Bill Francis (Contact Author)

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Yun Zhu

St. John's University - Peter J. Tobin College of Business

New York, NY
United States

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