MANAGERS’ POLITICAL IDEOLOGY AND DEBT

Abstract

**Please note that the full text is embargoed until 8/11/2024** 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.