TY - JOUR
T1 - Can lenders discern managerial ability from luck? Evidence from bank loan contracts
AU - Bui, Dien Giau
AU - Chen, Yan Shing
AU - Hasan, Iftekhar
AU - Lin, Chih-Yung
PY - 2018/2/1
Y1 - 2018/2/1
N2 - 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.
AB - 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.
KW - Agency and information risk
KW - Corporate governance
KW - Managerial ability
KW - Stakeholder relationship
KW - The cost of debt
UR - http://www.scopus.com/inward/record.url?scp=85042145975&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2017.09.023
DO - 10.1016/j.jbankfin.2017.09.023
M3 - Article
AN - SCOPUS:85042145975
VL - 87
SP - 187
EP - 201
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
ER -