CEO Optimism and the Cost of Bank Debt

This paper examines the effect of the level of CEO optimism on loan spread and number of covenants using 4869 loan facilities (tranches) made to 1271 U.S. industrial firms over the period 1992–2011. We find that banks charge significantly lower spreads and impose a smaller number of covenants on loans made to firms with moderately optimistic CEOs. However, banks tend to charge higher costs on loans made to firms with low‐ or high‐optimism CEOs. The results suggest that the level of CEO optimism and the costs of bank loans have a convex relation.