CEO compensation and bank loan contract

Abstract

Despite syndicated loan accounts for more than 40% of bank commercial loans, little is known about how bank CEO compensation impacts bank syndicated loan contracting. We find that banks with more CEO inside debt have lower non-performance loans and lend to safer borrowers. Using a two-stage selection model, we find that banks with more CEO inside debt extend syndicated loans with a smaller number of lenders in the syndication, lower spread, less restrictive covenant, and longer maturity. These loan terms indicate higher screening effort and borrower credit quality, consistent with the credit quality hypothesis of loan contracting. The findings are robust to potential endogeneity bias and simultaneity of various loan terms.