No-Fly Zone in the Loan Office: How CEOs’ Risky Hobbies Affect Credit Stakeholders’ Evaluation of Firms

Abstract

The extant research has often examined the work-related experiences of corporate executives, but their off-the-job activities could be just as insightful. This study employs a novel proxy for CEOs’ risky hobbies—CEOs’ hobby of piloting a private aircraft—and investigates its effect on credit stakeholders’ evaluation of the firms led by the CEOs as reflected in bank loan contracting. Using a longitudinal dataset on CEOs of large U.S. listed firms across multiple industries between 1993 and 2010, we obtain strong evidence that bank loans to firms steered by CEOs who fly private jets as a hobby tend to incur a higher cost of debt, to be secured, to have more covenants, and to be syndicated. These effects are mainly driven by banks which perceive such firms as having a higher default risk. These relationships become stronger when the CEO is more important to the firm and/or can exercise stronger control over decision-making. Supplemented by field interviews, our results are also robust to various endogeneity checks using different experimental designs, the Heckman two-stage model, a propensity score matching approach, a difference-in-differences test, and the impact threshold of confounding variables.

Keywords: Pilot CEO; Risky hobby; Off-the-job activities; Stakeholder theory; Upper echelons theory

JEL Classification: G30, M41, K22