Can lenders discern managerial ability from luck? Evidence from bank loan contracts

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Title: Can lenders discern managerial ability from luck? Evidence from bank loan contracts
Author: Bui, Dien Giau ; Chen, Yan-Shing ; Hasan, Iftekhar ; Lin, Chih-Yung
Series: Journal of Banking and Finance
Series volume: 87
Series number: February
Year of publication: 2018
Publication date: 15.2.2018
DOI: https://doi.org/10.1016/j.jbankfin.2017.09.023
Page range: 187-201
Subject (yso): luotot; kustannukset; korko; hinnoittelu; riskit; pankit; yritykset; kyvykkyys; johtajat; hallinto; informaatio
JEL: G21; G34
Other keywords: Managerial ability; The cost of debt; Agency and information risk; Corporate governance; Stakeholder relationship
Abstract: We investigate the effect of managerial ability versus luck on bank loan contracting. Borrowers showing a persistently superior managerial ability over previous years (more likely due to ability) enjoy a lower loan spread, while borrowers showing a temporary superior managerial ability (more likely due to luck) do not enjoy any spread reduction. This finding suggests that banks can discern ability from luck when pricing a loan. Firms with high-ability managers are more likely to continue their prior lower loan spread. The spread-reduction effect of managerial ability is stronger for firms with weak governance structures or poor stakeholder relationships, corroborating the notion that better managerial ability alleviates borrowers’ agency and information risks. We also find that well governed banks are better able to price governance into their borrowers’ loans, which helps explain why good governance enhances bank value.


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