Well-Connected CFOs Obtain More Favorable Terms on Corporate Loans
Well-connected chief financial officers obtain loans for their companies with more favorable terms and conditions as compared to those who have less “social capital,” according to a new study by a University of Arkansas researcher and colleagues.
“CFOs are the most important decision-makers on the borrower side,” said Tomas Jandik, finance professor in the Sam M. Walton College of Business. “These folks are responsible for negotiating loans on behalf of their employer. We found that those CFOs who have higher social capital – as assessed by their connectedness among all business professionals – are deemed more trustworthy, influential and powerful. This connectedness helped them achieve better contractual outcomes for their firms.”
Jandik and colleagues Kathy Fogel, a private economist, and William McCumber, finance professor at Louisiana Tech University, used BoardEx, a database of biographical information about corporate board members and senior executives, to track social links based on shared experiences like work and education to determine the social connectedness of leaders within a network of more than 400,000 individuals at public and private U.S. companies.
They found that social connectedness affected the outcome of loan negotiations and influenced better contract terms, after accounting for variables in personal characteristics, such as the quality of education or work experience.
Firms with CFOs in the 90th percentile of social connectedness received a 24-percent reduction in loan spread compared to a firm whose CFO was in the 10th percentile. Spread refers to a percentage rate on a loan offered by an entity above the established base interest rate and is calculated based on risk factors of the borrower and other variables.
Compared to firms with relatively unconnected CFOs, firms with well-connected CFOs were also much less likely to have a high number of covenant restrictions — performance requirements — in their debt contracts.
The study will be published in the October issue of Journal of Corporate Finance and is available online.
This research was supported by the University of Arkansas High Performance Computing Center.
Tomas Jandik is a professor of finance and holds the Dillard’s Chair in Corporate Finance in the Sam M. Walton College of Business. His research has been published in top finance and business journals, such as the Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Financial Management, Journal of Corporate Finance, and Journal of International Business Studies. He teaches courses in financial management, corporate valuation and others.