CEO Incentives, Relationship Lending, and the Cost of Corporate Borrowing

Abstract

We investigate how lending relationships attenuate the conflict of interest between creditors and shareholders that arises from chief executive officer (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 attenuate the impact of CEO risk-taking incentives on maturity and collateral requirements. This article highlights the importance of bank monitoring through lending relationships to mitigate managerial risk-shifting activities that arise from equity incentives.