Research Discussion Papers, Bank of Finland
No 29/2013:
Managerial style and bank loan contracting
Bill B. Francis ()
, Iftekhar Hasan ()
and Yun Zhu ()
Abstract: This paper provides direct evidence that managerial style
is a key determinant of the firm’s cost of capital, in the context of
private debt contracting. Applying the novel empirical method by Abowd,
Karmarz, and Margolis (1999) to a large sample that tracks job movement of
top managers, we find that managerial style is a critical factor that
explains a large part of the variation in loan contract terms. The
loan-term-related managerial styles correlate with managerial styles of
firm performance and corporate decisions, implying that certain managers
achieve better firm performance via lower cost of capital and other
desirable non-price loan terms. We further find direct evidence that banks
“follow” managers’ job changes and offer loan contracts with preferential
terms to their new firms. Some of the preferred managerial styles reflect
managers’ personal characteristics, such as managerial ability, authority
and conservatism.
Keywords: managerial style; cost of capital; bank loan contract; firm performance; firm decision-making; (follow links to similar papers)
JEL-Codes: G21; G32; G34; (follow links to similar papers)
42 pages, November 23, 2013
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