Managerial Effect or Firm Effect: Evidence from the Private Debt Market
35 Pages Posted: 20 May 2020
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: Suggested Citation
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Managerial Effect or Firm Effect: Evidence from the Private Debt Market
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