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

Bui, Dien Giau; Chen, Yan Shing; Hasan, Iftekhar; Lin, Chih‐Yung

doi:10.1016/j.jbankfin.2017.09.023

Cited by 61 publications

(33 citation statements)

References 57 publications

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“…In addition, these better managers have better knowledge of techniques to value potential businesses and a superior understanding of the cost and income drivers of their company (Gan, ). Thus, following Bui, Chen, Hasan, and Lin (), high‐ability managers are less likely than their peers to generate unrealistic expectations about future investments. Therefore, talented managers may be more able to select projects with positive net present value (NPV) for their companies and do not overpay for acquisitions, which favors the reduction of under‐ and overinvestment decisions.…”

Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Managerial Ability and Investment Efficiencymentioning

confidence: 99%

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Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

García‐Sánchez

García‐Meca

2018

Corporate Governance

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Manuscript type Empirical Research question/issue The main objective of this paper is to examine the influence of managerial ability on investment efficiency. Using a sample of 2185 firms from 24 countries for the period 2006–2015, we hypothesize a positive association between investment efficiency and managerial ability and suggest that able managers make fewer over‐ and underinvestment decisions. As a unique and helpful feature of this study, we also employ a model to capture the different interactions between internal and external corporate governance mechanisms and managerial ability. Research findings/insights Our results show that managerial ability is an economically relevant determinant of investment efficiency, resulting in lower levels of underinvestment and overinvestment. Additionally, our findings note that the benefits of able managers for investment efficiency are reinforced when companies are located in countries with better board effectiveness, superior investor protection, and better legal enforcement, suggesting that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. The results also indicate that the advantages of having able managers are especially noticeable during a financial crisis and under conditions of greater information asymmetry. Theoretical/academic implications Our findings suggest that governance mechanisms are effective complementary measures to constrain inefficient investment decisions. Specifically, our results highlight the relevance of the monitoring role of the board, noting that the efficiency of this internal control mechanism complements the effect that able managers have on investment efficiency. Practitioner/policy implications The paper has relevant implications. First, boards of directors must be aware that, although the access to financial resources is a determinant of firms' financial success, the individual ability to manage them is essential in making efficient investment decisions, which should be considered when recruiting new managers and establishing compensation schemes. Second, the paper shows that managerial ability is reinforced when the company is in a country with strong corporate governance mechanisms, implying that regulators should be aware of the relevance of investor protection, legal enforcement, and board effectiveness to improve the benefits of managerial attributes and therefore the financial efficiency of firms.

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Section: Background and Hypothesis Developmentmentioning

confidence: 99%

Section: Managerial Ability and Investment Efficiencymentioning

confidence: 99%

Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

García‐Sánchez

García‐Meca

2018

Corporate Governance

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“…3 AIDS is commonly used in the banking and loan pricing literature (see, e.g., James and Kizilaslan 2014;Dougal et al 2015;Berg, Saunders, and Steffen 2016;Campello and Gao 2017;Bui et al 2018).…”

Section: Introductionmentioning

confidence: 99%

U.S. Political Corruption and Loan Pricing

Hossain

Kryzanowski²,

Xiao

2020

J of Financial Research

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Using U.S. Department of Justice data on state‐level political corruption, we find that banks charge higher loan spreads (all‐in‐drawn spreads) to firms in states with higher corruption and that these effects are more pronounced for firms facing financial constraints but less pronounced for firms experiencing greater external monitoring. These results are robust to additional controls, alternative corruption measures, a measure of the lack of oversight of lobbyist activities, and the use of instrumental variables. Overall, our findings are consistent with the harmful corruption environment hypothesis, which states that banks charge higher loan spreads to firms in states with greater political corruption environments as these firms are susceptible to making suboptimal financial decisions to fend off rent‐seeking behavior.

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“…These studies have documented that managerial ability has a distinctive effect on a firm's financial reporting quality and earnings quality (Demerjian et al, 2013;Huang & Sun, 2017;Wang, Chen, Chin, & Zheng, 2017), earnings management activities (Skousen, Sun, & Wu, 2019), accounting and disclosure policies (Abernathy et al, 2018;Baik et al, 2011;Luo & Zhou, 2017;Sun, 2016), information environment (Baik et al, 2018), tax avoidance behaviour (Koester, Shevlin, & Wangerin, 2017), investment practices (Andreou et al, 2017;Gan, 2019;García-Sánchez & García-Meca, 2018;Habib & Hasan, 2017;Lee et al, 2018), risk-taking behaviour (Andreou et al, 2016;Yung & Chen, 2018), innovation activities (Y. Chen, Podolski, & Veeraraghavan, 2015), credit ratings (Bonsall, Holzman, & Miller, 2017;Cornaggia, Krishnan, & Wang, 2017), structure and pricing of debt (Bui, Chen, Hasan, & Lin, 2018;De Franco, Hope, & Lu, 2017;Petkevich & Prevost, 2018), dividend policies (Guan, Li, & Ma, 2018;Jiraporn, Leelalai, & Tong, 2016); audit fees (Gul, Khedmati, Lim, & Navissi, 2018;Li & Luo, 2017); firm performance (Banker, Darrough, Huang, & Plehn-Dujowich, 2013;Cox, 2017;Demerjian et al, 2012;Francis, Hasan, Mani, & Ye, 2016), and corporate social responsibility (CSR) performance (Chatjuthamard, Jiraporn, Tong, & Singh, 2016;García-Sánchez, Hussain, & Martínez-Ferrero, 2019;…”

Section: Managerial Ability and Investmentmentioning

confidence: 99%

Managerial Ability and Firm Performance: A Labour Management Perspective.

Yu¹

2020

Preprint

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We address the question how high ability managers achieve superior performance outcomes to their peers by examining how labour investment decisions and labour management outcomes differ based on managerial ability. We build on previous research that predicts expected labour investment (net hiring) based on economic factors and demonstrates that deviations from expected labour investment negatively affect future performance. A prediction based on this research is that deviations from expected labour investment decrease with managerial ability, with the associated consequence that performance is better for companies that deviate less from expected labour investment levels. But this linear prediction is limiting because, if high ability managers only match expected labour investment better than other managers, they would not perform much differently from other managers. High ability managers must see opportunities that are not readily apparent to other managers and take actions based on those opportunities. Therefore, we predict a non-linear relation between deviations from labour investment and managerial ability-that, up to a point, deviations from expected labour investment decrease with managerial ability but that deviations increase at high levels of managerial ability. A corresponding prediction is that deviations from expected labour investment that are made by higher ability mangers have a positive impact on future firm performance. We find support for both these predictions, whether deviations are negative or positive, consistent with high ability managers recognizing opportunities differently from other managers and achieving better performance outcomes when they deviate from expected labour investment.

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

Cited by 61 publications

References 57 publications

Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

Do talented managers invest more efficiently? The moderating role of corporate governance mechanisms

U.S. Political Corruption and Loan Pricing

Managerial Ability and Firm Performance: A Labour Management Perspective.

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