Graduation Semester and Year

2022

Language

English

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Finance

Department

Finance

First Advisor

Salil K. Sarkar

Abstract

This dissertation investigates the effect of managers’ political ideology and their level of managerial conservatism on their firms in the credit markets. In particular, we present three studies on the effect of managers’ political ideology and conservatism on loans’ spreads, credit ratings, and borrower-lender homophily. The level of executive's conservatism is inferred from their direct form of political donations. In chapter I, we provide an introduction that includes an overview and a background to motivate our research. In chapter II, we examine the effect of top managements’ conservatism on their firms' cost of bank loans. We find that firms with Republican-leaning executives have a lower cost of bank loans than firms with non-Republican executives. This finding persists across subsamples of firms with high and low information asymmetry. We also find that the direct effect of managerial conservatism on loan spreads is larger than its indirect effect through credit ratings. In chapter III, we shed light on the importance of the top managers’ conservatism in the evaluation process of credit rating agencies. The literature shows that firms with Republican-leaning CEOs have higher credit ratings, and we argue that the conservatism of the management team is at least as important to credit rating agencies as the conservatism of the CEO alone. We find that firms with conservative top five executives have higher credit ratings than other firms and that the impact of top managers’ conservatism on credit ratings is both economically and statistically higher than that of the CEOs alone. We also find that the conservatism of firms’ top managers remains important to credit rating agencies even after excluding the conservatism of the firms’ CEO. Finally, we find that firms with conservative top executives have less likelihood of receiving a future credit rating downgrade than other firms. In chapter IV, we explore the political ideology alignment between the top executives of borrowers and lenders. This study is motivated by the literature on the existence of different forms of homophily and its consequences at the organizational and inter-organizational levels. We find high political ideology homophily between the management teams of borrowers and lenders. By examining both price and non-price terms of loan contracts, we document several consequences of this relatively high homophily. In other words, we document a positive association between homophily and loan spreads; however, we find homophily to be associated with less covenant intensity and lower collateral requirements on the debt contracts. These homophily consequences indicate that both parties stand to benefit which is consistent with the homophily concept. Chapter V provides concluding remarks and highlights the main contributions.

Keywords

Managers' Political Ideology, Debt

Disciplines

Business | Finance and Financial Management | Real Estate

Comments

Degree granted by The University of Texas at Arlington

31457-2.zip (1830 kB)

Share

COinS
 
 

To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.