Managerial incentive structures, conservatism and the pricing of syndicated loans

Drawing on previous theoretical research, this thesis empirically explores the effect of manager-shareholder incentive alignment, as measured by the extent of equity compensation, on the pricing of syndicated loan contracts. Two principal findings are reported. First, this thesis documents that high levels of alignment are associated with larger risk premiums in loan spreads and more restrictive covenants. The potential endogeneity of managerial compensation contracts is dealt with by implementing a Propensity Score Matching methodology. Second, this thesis documents the effects of ex ante accounting conservatism on loan pricing terms, conditional on the managerial incentive structure as a proxy for managerial ex post reporting incentives. More specifically, it provides evidence that ex ante accounting conservatism decreases loan spreads and increases the number of financial covenants in the loan contract when managers receive average or below-average equity compensation. However, when managers receive above-average equity compensation, ex ante conservatism leads to banks demanding larger loan spreads as well as fewer and tighter financial covenants. These latter results are consistent with the interpretation that banks view ex ante conservatism as an instrument for reducing the monitoring value of financial covenants when managers have incentives to over-report ex post due to large equity compensation.