Do managerial abilities matter? Evidence from U.S. bank loans and corporate sustainability

Abstract

This study examines how managerial abilities affect the link between the cost of bank loans and corporate sustainability. We contend that sustainability activities reduce the cost of bank loans, and that this effect depends on managerial abilities and the company's credit quality. Using a U.S. dataset of 3,537 bank loan facilities, we conduct different multivariate regressions to test our predictions. Our findings reveal that corporate sustainability significantly decreases the cost of bank loan financing for firms with high managerial abilities relative to those with low managerial abilities. Furthermore, we found that corporate sustainability significantly decreases the bank loan financing cost for high-quality borrowers with high managerial abilities relative to low-quality borrowers with low managerial abilities. Overall, this research contributes to the literature by showing that the impact of corporate sustainability practices on the cost of bank loans does not only depend on the borrower's credit quality, as shown in prior empirical studies, but also on managerial abilities. Firms with both high credit quality and high managerial abilities enjoy lower bank loan costs. Our results have important implications. In particular, they provide valuable insights for firms seeking to improve their borrowing conditions, bankers aiming to assess borrowers’ quality, and policymakers looking to promote corporate sustainable behavior.