CFO social capital and private debt

• Published in: Journal of corporate finance (Amsterdam, Netherlands) Vol. 52; pp. 28 - 52
• Main Authors: Fogel, Kathy, Jandik, Tomas, McCumber, William R.
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.10.2018
• Subjects: Chief financial officer; Debt contracting; Debt covenants; Loan spreads; Network centrality; Social capital; G32; Loan spreads; Chief financial officer; Debt contracting; Debt covenants; L14; Social capital; Network centrality
• ISSN: 0929-1199; 1872-6313
• DOI: 10.1016/j.jcorpfin.2018.07.001

The cost and terms of private debt are affected by the social capital of the borrowing firm's chief financial officer (CFO), proxied by measures of social network centrality that identify the relative position of CFO in the hierarchy of executives. Firms with CFOs possessing higher social capital issue new loans with lower spreads and fewer covenant restrictions, controlling for all direct connections between borrowers and lenders. Spread reductions are stronger for opaque firms and when CFOs lack objective reputation verification. The results hold when controlling for CFO personal characteristics and firm attributes related to network centrality. •The social capital of the CFO is associated with positive firm outcomes in debt contracting•Firms with CFOs who have higher social capital issue initial loans with lower spreads and fewer financial covenants•CFO social capital provides greater benefits to opaque firms and in situations where CFO reputation has not been verified•CFO social capital is important beyond the effects of local or firm-level social capital•CFO social capital leads to debt contracting benefits beyond the impact of direct links between borrowers and lenders