02.10.2021

Who Your Manager Is Matters When It Comes to Borrowing from Banks

Do banks value their relationship with corporate managers? There is ample evidence that banks can alleviate information asymmetry and agency problems by engaging in repeated lending with the same borrowing company. The question is whether lenders value repeated lending with the same corporate manager and what kind of manager characteristics are important to the lending decision.

We show that when a manager changes her job from the origin firm to the destination firm, the lender that has interacted with her in the origin firm is likely to co-migrate with her and initiate new loans in the destination firm. Co-migration happens because lenders can benefit from their knowledge about the manager’s creditworthiness, risk-taking behavior, and other characteristics that may affect the firm’s credit risk but are not directly observable to outsiders without close interactions. However, if the manager has experienced any accounting irregularities (e.g., Accounting and Auditing Enforcement Releases, accounting restatement, internal control weaknesses) in the original firm, lenders are less likely to co-migrate. The reason is that these accounting irregularities impede lenders’ ability to use accounting information to assess the firm’s credit quality and the manager’s trustworthiness. Finally, even the banks with excellent monitoring efficiency are most reluctant to follow the manager if the manager has engaged in accounting irregularities in the origin firm.

Main-takeaway: As a manager, it’s worth maintaining a good personal relationship with the bank, but accounting irregularities will diminish the value of the personal lending relationship. Therefore, it’s not wise to engage in any accounting manipulations since they have long-term reputation consequences that even follow the manager to the next job when it comes to borrowing from the bank.