No-Fly Zone in the Loan Office: How Chief Executive Officers’ Risky Hobbies Affect Credit Stakeholders’ Evaluation of Firms

Bo Ouyang (), Yi Tang (), Chong Wang () and Jian Zhou ()
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Bo Ouyang: Management Division, Pennsylvania State University at Great Valley, Malvern, Pennsylvania 19425
Yi Tang: HKU Business School, University of Hong Kong, Pokfulam, Hong Kong
Chong Wang: School of Accounting and Finance, Faculty of Business, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
Jian Zhou: School of Accountancy, Shidler College of Business, University of Hawai’i at Manoa, Honolulu, Hawaii 96822

Organization Science, 2022, vol. 33, issue 1, 414-430

Abstract: The extant research has often examined the work-related experiences of corporate executives, but their off-the-job activities could be just as insightful. This study employs a novel proxy for the risky hobbies of chief executive officers (CEOs)—CEOs’ hobby of piloting a private aircraft—and investigates its effect on credit stakeholders’ evaluation of the firms led by the CEOs as reflected in bank loan contracting. Using a longitudinal data set on CEOs of large United States-listed firms across multiple industries between 1993 and 2010, we obtain strong evidence that bank loans to firms steered by CEOs who fly private jets as a hobby tend to incur a higher cost of debt, to be secured, to have more covenants, and to be syndicated. These effects are mainly driven by banks, which perceive such firms as having a higher default risk. These relationships become stronger when the CEO is more important to the firm and/or can exercise stronger control over decision making. Supplemented by field interviews, our results are also robust to various endogeneity checks using different experimental designs, the Heckman two-stage model, a propensity score-matching approach, a difference-in-differences test, and the impact threshold of confounding variables.

Keywords: pilot CEO; risky hobby; off-the-job activities; stakeholder theory; upper echelons theory (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:33:y:2022:i:1:p:414-430

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