Information sharing and loan outcome: Evidence from CEO/CFO-bank links

Abstract

Does information sharing affect bank loan contract? We examine a unique information sharing channel that arises when chief executive officers (CEOs) or chief financial officers (CFOs) of home firms are also directors of banks' existing clients (connected firms). This channel is labelled as ‘CEO/CFO-bank links’, and these banks are referred to as connected banks in this study. We find that a home firm is more likely to have its connected bank as the loan provider, and the loan spread is lower than that of bank loan with a non-connected bank. Further analysis reveals that the above associations are more pronounced when connected firms are more closely monitored by the connected banks, when the information environment of home firms is weaker, or when the linkage between connected banks and home firms is stronger. Overall, our results suggest that CEO/CFO-bank links enable banks to access more firm-specific information, which influences the lending decisions.