Managerial ability and bank‐loan pricing. (17th August 2017)

• Record Type: Journal Article
• Authors: De Franco, Gus; Hope, Ole‐Kristian; Lu, Haihao
• Is Part Of: Journal of business finance & accounting. Volume 44:Number 9/10(2017)
• Page Start: 1315
• Page End: 1337
• Publication Date: 2017-08-17
• Subjects: bank‐loan pricing -- disclosure -- fundamentals -- managerial ability -- path analysis; Finance -- Periodicals; Accounting -- Periodicals; Business -- Periodicals; 658.15
• DOI: 10.1111/jbfa.12267
• Languages: English
• ISSNs: 0306-686X

Abstract

Abstract: This paper examines the impact of borrowers' managerial ability on lenders' bank‐loan pricing and the channels through which managerial ability affects bank‐loan pricing. Using a large sample of US bank loans, we provide evidence that higher managerial ability is associated with lower bank‐loan prices. This effect is stronger in firms with high information risk, suggesting that an important channel for managerial ability to affect bank‐loan pricing is through improved financial disclosure to mitigate information asymmetry. The relationship is also stronger for firms with weak business fundamentals, implying that another channel is through improved business performance. Of these two mechanisms, path analysis suggests that the business‐fundamentals mechanism is the more important channel through which managerial ability affects bank‐loan pricing.