Topic: Credit and Punishment: Career Incentives in Corporate Banking
Speaker: Janet Gao, Assistant Professor in Finance, Kelley School of Business, Indiana University
Date: April 5th (Wednesday)
Location: Building 4, Room 101
This study examines the role of career incentives in disciplining bankers' risk-taking and influencing loan performance in the market for corporate loans. In particular, we study the relationship between negative credit events (i.e., defaults, bankruptcies, and rating downgrades) and career turnover for loan officers underwriting syndicated loans. We construct a comprehensive dataset containing the identities and employment histories of nearly 1,500 loan officers employed by major corporate banking departments from the period spanning 1994 to 2014. We find that, following a negative credit shock in a loan officer's portfolio, the officer is more likely to depart her bank, transition to a lower-ranked bank, and face a demotion in the future. Further, negative credit events provide a more informative signal to bank managers regarding a loan officer's ability when information asymmetries are more pronounced in the bank. We also find that termination practices effectively incentivize loan officers to impose stricter lending terms on future loans (i.e., more covenants and greater covenant strictness). Our findings suggest that banks use negative credit events as signals to judge loan officer quality and that career incentives help to reinforce proper monitoring in the privately placed debt market.
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