CEO political orientation and loan contract

Banks rely on soft information when assessing loan applications, making it crucial to evaluate the trustworthiness of potential borrowers in order to set loan conditions, even in a legal environment where contractual rights are straightforwardly enforced. Given the common belief that certain personality traits-such as trustworthiness, reliability, loyalty, thriftiness, and stinginess-are more often linked to conservatives (Republicans) than to liberals (Democrats), we investigate whether companies with conservative chief executive officers (CEOs) secure more advantageous loan terms compared to others. Our findings indicate that firms with conservative CEOs are able to negotiate bank loans with lower interest spreads and upfront fees. While we do not observe a direct impact of CEO overconfidence on loan pricing, we reveal that the combined influence of CEO conservatism and overconfidence contributes to our primary findings. Additionally, we discovered that conservative CEOs tend to receive more favorable non-price conditions (fewer covenants) and are less inclined to offer collateral.