Managerial style and bank loan contracting

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Title: Managerial style and bank loan contracting
ISBN: 978-952-6699-50-9
Author: Francis, Bill B. ; Hasan, Iftekhar ; Zhu Yun
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2013
Series number: 29/2013
Year of publication: 2013
Publication date: 20.11.2013
Published in: Published as Managerial effect or firm effect: Evidence from the private debt market, Financial Review (2019 online first)
Pages: 46 s.
Keywords: pankkitoiminta; luotot; yritykset; sopimukset; johtajat; kustannukset; pääoma;
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

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