CEO Duality and Bank Loan Contracting: Evidence from China

This paper investigates the impact of CEO duality on bank loan contracting costs. Using hand-collected data of China's loan contracting terms throughout 2004-2020, we find that CEO duality leads to stricter loan contracting terms, shown as higher adjusted loan rates and shorter loan maturity. The results hold after we perform robustness tests including change analyses, propensity score matching analyses, as well as tests based on exogenous CEO turnovers. The positive relationship between duality and loan costs is more pronounced among firms with higher internal and external uncertainties. We further find that information asymmetry and CEO entrenchment are possible channels through which CEO duality increases bank loan contracting costs. Overall, the evidence supports the agency theory view that CEO duality increases firm's credit risk, thus leading to stricter bank loan contracting terms.

Automated summary

This paper examines the impact of CEO duality on bank loan contracting costs. The findings indicate that CEO duality results in stricter loan contracting terms, including higher loan rates and shorter loan maturity. The results are robust after conducting various tests and are more pronounced for firms facing higher internal and external uncertainties. Information asymmetry and CEO entrenchment are identified as potential channels through which CEO duality increases bank loan contracting costs. The evidence supports the agency theory view that CEO duality increases credit risk and leads to stricter bank loan contracting terms.