CEO Incentives, Relationship Lending and the Cost of Corporate Borrowing

45 Pages Posted: 26 Feb 2015 Last revised: 11 Sep 2016

See all articles by Liqiang Chen

Liqiang Chen

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Date Written: May 17, 2016

Abstract

This paper investigates how lending relationships attenuate the conflict of interest between creditors and shareholders that arises from CEO compensation contracts. We find that lending relationships mitigate the influence of CEO risk-taking incentives on loan spreads, especially for informationally-opaque firms. In addition, lending relationships also attenuate the impacts of CEO risk-taking incentives on maturity and collateral requirements. This study highlights the importance of bank monitoring through lending relationships to mitigate managerial risk-shifting activities that arise from equity incentives.

Keywords: risk-taking incentives; bank relationship, cost of debt

JEL Classification: G3, G21, G32, J33

Suggested Citation

Chen, Liqiang and Qiu, Jiaping, CEO Incentives, Relationship Lending and the Cost of Corporate Borrowing (May 17, 2016). Available at SSRN: https://ssrn.com/abstract=2569490 or http://dx.doi.org/10.2139/ssrn.2569490

Liqiang Chen

Saint Mary's University, Canada - Department of Finance, Information Systems & Management Science ( email )

Halifax, Nova Scotia B3H 3C3
Canada

Jiaping Qiu (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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