Unwinding Loan Prospecting Pressure through Renegotiation: The Role of Loan Officer Changes in Debt Contracting
Abstract
We examine the impact of loan officer changes on debt contract design. Loan officers face pressure to originate new loans, incentivizing them to offer loan terms that are more favorable than warranted by borrowers’ creditworthiness. Because a loan officer who replaces the originating loan officer is not subject to this loan prospecting pressure, we predict that she reverses the favorable discretion exercised at loan origination. Consistent with this prediction, we find that the first renegotiation following the replacement of the originating loan officer is associated with more unfavorable renegotiation outcomes. This effect is more pronounced when loan prospecting pressure at loan origination is greater—when the originating loan officer is less experienced, when the lead arranger faces tight performance benchmarks or lower income growth, and when credit market competition is more intense. Overall, we provide novel insights into how loan officer changes restore contracting efficiency through renegotiations. Data Availability: Syndicated loan data are from DealScan; borrower financial data are from Compustat and CRSP; bank financial data are from the Call Report and Compustat; loan agreements are from Morningstar, FactSet, and SEC filings; analyst data are from I/B/E/S; credit rating data are from S&P Global Ratings and the Mergent Fixed Income Securities Database (FISD); media coverage data are from RavenPack; covenant violation data are from Nini, Smith, and Sufi (2012); and loan officer employment histories were hand collected from LinkedIn.
- DOI
- 10.2308/tar-2025-0120
- Pages
- 1-31
- Language
- en
- Sources
- crossref openalex