Management faultlines and the cost of bank loans

Abstract

This study investigates the impact of faultlines within the top management team (TMT) on the cost of bank loans. TMT faultlines divide a TMT into relatively homogeneous subgroups based on the alignment of members' demographic attributes, which can affect TMT functioning. We find that firms with stronger TMT faultlines incur higher loan spreads when seeking bank financing. The path analysis reveals that strong TMT faultlines increase both default risk and information risk, which in turn raise loan spreads charged by banks. Further tests show that the adverse effect of TMT faultlines on bank loan costs is mitigated when borrowing firms have strong corporate governance or borrow from relationship lenders, whereas this adverse effect is more pronounced during financial crisis period with credit tightening. Additionally, we find that borrowing firms with stronger TMT faultlines face higher facility and commitment fees and shorter loan maturities. Overall, this study contributes to the corporate governance literature by highlighting the economic consequences of TMT faultlines in debt contracting and offers practical implications for both debtors and creditors.