CEO Incentives, Relationship Lending and the Cost of Corporate Borrowing

This paper investigates how lending relationships attenuate the conflict of interest between creditors and shareholders that arises from 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 also attenuate the impacts of CEO risk-taking incentives on maturity and collateral requirements. This study highlights the importance of bank monitoring through lending relationships to mitigate managerial risk-shifting activities that arise from equity incentives.