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Managerial style and bank loan contracting

  • Francis, Bill B.

    ()

    (Lally School of Management, Rensselaer Polytechnic Institute)

  • Hasan, Iftekhar

    ()

    (Fordham University and Bank of Finland)

  • Zhu, Yun

    ()

    (Lally School of Management, Rensselaer Polytechnic Institute)

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.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1329.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 29/2013.

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Length: 42 pages
Date of creation: 23 Nov 2013
Date of revision:
Handle: RePEc:hhs:bofrdp:2013_029
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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