Managerial Ability and Debt Choice
Md Samsul Alam, Mostafa Monzur Hasan,
Nurul Alam,
Md Shahidul Islam,
Corresponding Author
Mostafa Monzur Hasan
Department of Accounting and Corporate Governance, Macquarie Business School, Macquarie University, Sydney, NSW, 2109 Australia
Search for more papers by this authorNurul Alam
The University of Sydney Business School, The University of Sydney, Camperdown, NSW, 2006 Australia
Search for more papers by this authorMd Shahidul Islam
Essex Business School, University of Essex, UK
Search for more papers by this authorMd Samsul Alam, Mostafa Monzur Hasan,
Nurul Alam,
Md Shahidul Islam,
Corresponding Author
Mostafa Monzur Hasan
Department of Accounting and Corporate Governance, Macquarie Business School, Macquarie University, Sydney, NSW, 2109 Australia
Search for more papers by this authorNurul Alam
The University of Sydney Business School, The University of Sydney, Camperdown, NSW, 2006 Australia
Search for more papers by this authorMd Shahidul Islam
Essex Business School, University of Essex, UK
Search for more papers by this authorThe authors thank the editor, Stewart Jones, and an anonymous reviewer for helpful comments and suggestions on earlier drafts of this paper. They also acknowledge helpful comments and suggestions from Mark Clatworthy, Grantley Taylor, Prem Puwanenthiren, Haiyan Jiang, Carl Shen, Ileana Steccolini, Ahsan Habib, and Riaz Uddin. They are grateful to Peter Demerjian for making managerial ability data publicly available. Finally, thanks are due to Xianyang Xin for excellent research assistance. The usual disclaimer applies.
Abstract
Using a sample of 54,964 firm-year observations of US public firms during the period 2001 to 2020, we investigate how managerial ability affects corporate debt choice. We find evidence that managerial ability is negatively associated with the use of bank debt. This finding remains robust to a battery of robustness tests, including alternative measures of managerial ability and debt choice, various econometric specifications, and a range of endogeneity tests. Using the sudden death of the CEO as an exogenous shock to managerial ability, our difference-in-differences regression suggests a negative causal relationship between managerial ability and reliance on bank debt. Further, using advanced machine learning models, we identify that managerial ability is a highly influential variable in predicting firms’ debt choices. Our cross-sectional tests indicate that this relationship is more pronounced in the presence of higher information opacity, weaker corporate governance, and poor financial conditions. In additional tests, we show that firms with more able managers use more unsecured debt and public debt. Taken together, our findings suggest that managerial ability matters in shaping corporate debt choice.
Supporting Information
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