Finance Research Letters xxx (xxxx) xxxx

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Finance Research Letters

journal homepage: www.elsevier.com/locate/frl

Managerial Ability and Bank Lending Behavior

Xuan Vinh Voa, , Thi Hoang Anh Phamb, Thang Ngoc Doanc, Hiep Ngoc Luuc
⁎

a
Institute of Business Research and CFVG Ho Chi Minh City, University of Economics Ho Chi Minh City, 59C Nguyen Dinh Chieu Street, District 3, Ho
Chi Minh City, Vietnam
b
Banking Academy of Vietnam, 12 Chua Boc Street, Dong Da District, Ha Noi, Vietnam
c
University of St Andrews, St Andrews, UK

ARTICLE INFO ABSTRACT

Keywords: This paper investigates the role of latent, unobservable managerial ability on bank lending be-
Managerial ability havior. The empirical results suggest that more able managed banks produce higher amount of
Bank lending behavior loans. The result is hold regardless of the size of the banks and period of time. We also find that
JEL codes, G20, G21 more ably managed banks have greater loan quality. Results are robust to different econometric
specifications and alternative classifications of managerial ability.

1. Introduction

The banking sector is one of the backbones of the economic system that facilitates capital accumulation and economic growth,
mostly through their core function of credit supply (Vo and Nguyen, 2018; Vo, 2020). To that extent, significant efforts have been
devoted toward understanding bank lending behavior. Much of existing studies focus on the broad environment where banks operate
and examine whether macroeconomic conditions (Sharpe, 1990; Hu and Gong, 2019), banking regulation (Fidrmuc and Hainz, 2013;
Gersbacha and Rochet, 2017), government intervention (Bassett et al., forthcoming) and industry-specific characteristics (Boot and
Thakor, 2000) alleviate or ameliorate bank lending. Another growing strand of literature evaluates how bank-specific features, such
as bank size, capital, liquidity, and governance structure (i.e. Altunbas et al., 2016; Kim and Sohn, 2017; Faleye and Krishnan, 2017;
Vo, 2018) influence bank lending.
Despite this large literature, scholar have given much less attention on the role of managerial ability on shaping bank lending
activities. One possible reason is because managerial ability, by its nature, is latent and cannot be directly measured. Several re-
searchers (i.e. Ho et al., 2016; King et al., 2016) attempt to examine the role of executive characteristics (i.e. CEO power, CEO
confidentiality, and CEO education) on bank lending. However, they often been criticized of being too narrowly focus on only one or
few top executives and ignore the fact that banks are also run by other experts (Demerjian et al., 2012). In addition, since many of
banks operational activities and financial outcomes are outside of management's controls, the conventional method used to capture
managerial ability (i.e. financial performance, and media coverage) often fail to disentangle managerial ability from bank-specific
effects. To this end, this gives rise to the concern over the accuracy of the estimation results and ultimately do not enables readers to
draw broad inferences from the empirical results.
In this paper, we contribute to the growing literature on bank lending behavior by focusing on the role of managerial ability.
Specifically, we first quantify managerial ability using a better and more accurate method recently developed by
Demerjian et al. (2012). Then, we add to the literature by directly evaluating the impact of managerial ability on bank lending. One

Corresponding author.
⁎

E-mail addresses: [email protected] (X.V. Vo), [email protected] (T.H.A. Pham), [email protected] (T.N. Doan),
[email protected] (H.N. Luu).

https://doi.org/10.1016/j.frl.2020.101585
Received 6 July 2019; Received in revised form 27 March 2020; Accepted 13 May 2020
1544-6123/ © 2020 Elsevier Inc. All rights reserved.

Please cite this article as: Xuan Vinh Vo, et al., Finance Research Letters, https://doi.org/10.1016/j.frl.2020.101585
X.V. Vo, et al. Finance Research Letters xxx (xxxx) xxxx

may also posit that banks operational strategies (including lending) and behavior varies across the bank's size (Stein, 2002;
Berger and Udell, 2006). We aim to formally test this conjunction by examining how managerial ability relate to bank lending in
small banks, medium banks, and large banks. Furthermore, to explicitly account for the business environment, and to capture for the
change in social-economic condition overtime, we also examine bank lending behavior during ‘normal’ time and ‘distress’ time. This
empirical assessment is important because of the long-lasting catastrophic meltdown caused by the recent financial crisis as well as
the lack of comprehensive study of the current literature.
Using data from 8,379 U.S banks over the period 1990-2017, we find that more able managed banks are capable of generating
higher volume of loans. We also find a monotonic and positive relation between managerial ability and bank lending across banks
with different size and period of time. Further analysis reveal that that managerial ability and loan quality are positively related.
The remainder of this paper includes as follows. Section 2 introduces model specification and data. Section 3 presents and
discusses the empirical results. Section 4 reports some additional analyses. Section 5 provides some robustness tests and Section 6
concludes.

2. Model Specification and Data

2.1. Measuring managerial ability

Previous researches (i.e. DeYoung, 1998) show that management ability can be reflected in overall firm efficiency as it is an
important determinant of overall efficiency. In line with this proposition, Demerjian et al. (2012) suggest that the overall efficiency
score of a firm should capture both observable firm-specific characteristics and unobservable managerial ability. They then propose
that an economically significant manager-specific component of ability can be captured as the residual from a regression of overall
efficiency on a set of observable firm-specific determinants of efficiency. In this paper, we employ a methodology similar to
Demerjian et al. (2012) and extract the specific managerial ability score from the obtained overall bank efficiency score. This method
has been empirically supported with regard to reliability and validity (Demerjian et al. 2012; Krishnan and Wang, 2015;
Andreou et al. 2016)
However, unlike in Demerjian et al. (2012), where the overall efficiency score is estimated using a nonparametric Data Envel-
opment Analysis (DEA) approach, we estimate the overall bank efficiency score using the parametric stochastic-frontier-analysis
(SFA) method proposed by Aigner et al. (1977). We prefer SFA over DEA because the efficiency estimation with a nonparametric
approach like DEA has often been criticized for providing unreliable outcomes due to the attribution measurement noises and model
specification errors in the inefficiency score (Wezel, 2010; Sun and Chang, 2011). In line with this argument, Andreou et al. (2016)
also use the SFA method to estimate managerial ability in banks. To this end, we adopt the amended Demerjian et al. (2012)’s method
and estimate banks’ cost efficiency with the application of the parametric SFA approach. The translog cost function to estimate banks’
cost efficiency is based on its dominant and widespread use in the recent banking literature (i.e. Sun and Chang, 2011) and is
specified as follows:
3 1 3 3 3
ln TCit = 0 + n=1 n ln pnit + 2 n=1 m = 1 nm
ln pnit ln pmit + n=1 n
ln ynit
1 3 3 3 3
+ 2 n=1 m = 1 nm
ln ynit ln ymit + n = 1 m=1 nm ln ynit ln pmit + it (1)

Where lnTCit is the natural logarithm of total costs used by bank i in year t. Total cost (TC) is measured as the sum of interest expense
and noninterest expense as in Fiordelisi (2007). pnit is the price of the nth input employed by bank i in year t, ynit is the amount of the
nth output produced by bank i in year t. α, β, δ, and λ are coefficients to be estimated. εit is stochastic or aggregate disturbance term.
Following the standard bank efficiency literature (i.e. Berger and Mester, 2003; Fiordelisi, 2007; Hall and Simper, 2013;
Andreou et al. 2016), we estimate the translog cost function to evaluate the cost efficiency of banks using four outputs: (i) consumer
loans, (ii) business loans, (iii) real estate loans, (iv) non-loan financial assets (i.e. securities); and four input prices: (i) price of fund,
calculated as the ratio of interest expenses on core deposits (including savings deposits, transactions accounts, time deposits) to total
core deposits; (ii) price of labor, calculated as the ratio of total employee salary and benefit to the number of full-time equivalent
employees; (iii) price of physical capital, calculated as the share of capital expenses of premises and fixed assets to total fixed assets;
(iv) price of financial capital, calculated as the ratio of expenses of funds purchased to total purchased funds. Ultimately, the efficient
score is estimated from the above specification.
In the next step, we follow Demerjian et al. (2012) and Andreou et al. (2016) and estimate managerial ability by regressing
efficiency score on a set of bank-specific characteristics including bank size, age, labor, and provisions. Then, managerial ability can
be obtained from the residual between actual and predicted efficiency derived from the following pooled Tobit regression:
XEFFit
= 0+ 1 SIZEit + 2 AGEit + 3 LABORit + 4 PROVISIONSit + YEAR DUMMIES + it (2)

Where XEFFit denotes cost-efficiency score estimated by Eq. 1 of bank i in year t and εit is the error term.

2.2. Model specification

We employ a standard panel fixed effects approach to estimate the effect of managerial ability on bank lending behavior:

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X.V. Vo, et al. Finance Research Letters xxx (xxxx) xxxx

Table 1
Variable definitions.
Variable Name Variable Definition Source

TOTAL LOANS Natural logarithm of total loans Bank Call Report

MANAGERIAL ABILITY Managerial ability score estimated from the overall bank efficiency score Efficiency model
SIZE Natural logarithm of total assets Bank Call Report
AGE Natural logarithm of number of years in operation plus one Bank Call Report
INTANGIBLE The ratio of intangible assets to total assets Bank Call Report
CAPITAL The ratio of equity capital to total assets Bank Call Report
DEPOSIT GROWTH The growth rate of bank deposits Bank Call Report
PROVISION The ratio or loan loss provisions to total assets Bank Call Report
LABOR Natural logarithm of total number of employees Bank Call Report

LENDINGit
= 0 + 1 MANAGERIAL ABILITYi, t 1 + 2 BANK CHARACTERISTICSi, t 1 + YEAR DUMMIES + BANK DUMMIES + it (3)
Where LENDING is the proxy for bank lending behavior and measured as the natural logarithm of total bank loans. MANAGERIAL
ABILITY is the score obtained from the Eq. 2 as explained in the prior section. Following the literature, we also include a set of control
variables that may affect bank lending including bank age, size, total loans, intangible assets, bank capital, provisions, and labor
growth. Variable name and definition are reported in Table 1, whereas their summary statistics are given in Table 2. εit is the error
term. To this end, MANAGERIAL ABILITY and all other right-hand-side variables are in their lag form to mitigate endogeneity.
As noted earlier, we are also interested in investigating whether the impact of managerial ability on bank lending varies across
different banks and period of time. To do so, we first split the sample based on banks size, and re-estimate Eq. 3 for each sub-group
accordingly. We follow Berger and Bouwman (2009) and consider banks those having total assets of less than $1 billion as being small
banks, those having total assets between $1 – $3billions as being medium-size banks, and those having more than $3 billion in total
assets as large banks. We also follow literature and consider the period 2007 – 2009 as being crisis period, making the period 1990-
2006, and 2010-2017 being pre-crisis and post-crisis period, respectively. Subsequently, Eq. 3 is re-estimated for each of the three
time windows.

2.3. Data and sample overview

We conduct our empirical analysis based on the sample containing virtually all banks operating in the U.S. during the period
1990-2017. The balance sheet and income statement data of each bank were retrieved from their annual reports. We then remove
bank-year observations that provide inadequate data. We also winsorize all continuous variables at 1st and 99th percentile levels of
their distribution to mitigate the concern that our results could be driven by outlier or data error. 99,685 bank-year observation was
left in our sample. It is worth noting that our empirical models require the use of lag of most variables to mitigate the endogeneity
concern. To this end, the final sample comprises a maximum of 71,307 bank-year observations of 8,379 banks over the entire period
of 1990-2017.

3. Empirical Results

Table 3 presents the results of the baseline model (3). Column 1 reports the results of the full sample. As can be seen from the first
column, the estimated coefficient on MANAGERIAL ABILITY is positive and strongly significant, indicating that banks led by higher
ability managers are in the position of generating higher loans. This finding is consistent with those findings of DeYoung (1998). With
regards to other variables, we find that bank size, deposit growth and labor are positively related to bank lending. On the other hand,
we find that bank lending appears to be lessened as bank age and capital increase.
Previous research (i.e. Berger and Udell, 2006) also suggests that bank size can play a crucial role in the bank lending decision.
For example, while large banks are better at dealing lending's hard information, small banks take advantages in processing soft

Table 2
Summary statistics.
Variable N Mean Std. Min p25 medium p75 Max

TOTAL LOANS 99,685 11.602 1.516 6.578 10.585 11.429 12.379 20.666
MANAGERIAL ABILITY 99,685 0.819 0.048 0.396 0.792 0.822 0.850 1.499
SIZE 99,685 12.098 1.461 7.999 11.132 11.902 12.805 21.484
AGE 99,685 3.947 0.968 0.693 3.401 4.382 4.635 5.455
INTANGIBLE 99,685 0.005 0.013 0.000 0.000 0.000 0.003 0.490
CAPITAL 99,685 0.097 0.029 0.000 0.079 0.091 0.108 0.957
DEPOSIT GROWTH 99,685 0.096 0.261 -0.961 0.006 0.054 0.121 10.704
PROVISION 99,685 0.945 0.516 0.010 0.670 0.860 1.090 17.590
LABOR 99,685 4.079 1.342 0.693 3.178 3.912 4.736 12.368

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X.V. Vo, et al. Finance Research Letters xxx (xxxx) xxxx

Table 3
Managerial ability and bank lending.
Full Sample Small Banks Medium-size Banks Large Banks Pre-Crisis Crisis Post-Crisis
(1) (2) (3) (4) (5) (6) (7)

MANAGERIAL ABILITY 2.848*** 2.957*** 1.846*** 1.312*** 2.387*** 1.278*** 0.784***

(0.175) (0.182) (0.353) (0.463) (0.341) (0.248) (0.188)
SIZE 0.757*** 0.714*** 0.363*** 0.729*** 0.697*** 0.264*** 0.785***
(0.014) (0.013) (0.049) (0.041) (0.021) (0.034) (0.025)
AGE -0.053*** -0.065*** 0.022 0.254** 0.031 0.044 0.117***
(0.013) (0.013) (0.075) (0.107) (0.020) (0.043) (0.035)
INTANGIBLE 0.141 -0.268 1.370* 1.451 -0.196 -0.078 -0.330
(0.252) (0.270) (0.744) (0.928) (0.341) (0.608) (0.810)
CAPITAL -0.305** -0.276** -1.112** -0.509 -0.294* 0.025 1.163***
(0.130) (0.133) (0.474) (0.572) (0.174) (0.312) (0.224)
DEPOSIT GROWTH 0.054*** 0.065*** -0.003 -0.051** 0.039*** 0.030* -0.020
(0.008) (0.009) (0.018) (0.021) (0.010) (0.015) (0.014)
PROVISION -0.003 -0.014** -0.064*** 0.035 0.019 -0.111*** -0.015**
(0.006) (0.006) (0.016) (0.023) (0.012) (0.007) (0.007)
LABOR 0.241*** 0.288*** 0.064 -0.067 0.224*** 0.114*** 0.065**
(0.019) (0.016) (0.043) (0.042) (0.033) (0.035) (0.027)
CONSTANT -0.703*** -0.472*** 6.524*** 2.267*** 0.083 7.143*** 0.817**
(0.153) (0.160) (0.666) (0.742) (0.249) (0.440) (0.360)
Year FEs YES YES YES YES YES YES YES
Bank FEs YES YES YES YES YES YES YES
R-squared 0.884 0.870 0.654 0.733 0.835 0.291 0.719
Observations 71,307 62,083 5,205 4,019 46,764 9,732 14,811

Note: Robust standard errors are in parentheses.

***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively.

information (Stein, 2002). Thus, we further investigate whether or not the impact of managerial ability on bank lending varies across
banks having different size. To do so, we divide the full sample into three sub-samples by bank size as in Berger and Bouwman (2009)
and re-estimate Eq. 3 on each sub-sample accordingly. The regression results are reported in columns 2-4. Overall, the results are
homogenous across all specifications, and reinforce the finding of the baseline model that managerial ability matters in facilitating
bank lending.
Next, we examine whether managerial ability has the pivotal role in shaping bank lending behavior overtime. To do so, we divide
the full sample into three sub-samples: pre-crisis (1990-2006), crisis (2007-2009), and post-crisis (2010-2017). We re-estimate our
baseline model (3) on each sub-sample accordingly and present the results in column 5-7. Overall, we find strong and consistent
evidence that managerial ability matters in facilitating bank lending. This finding supports the proposition of Berger and Bouwman
(2013, 2017).
The empirical results reported thus far illustrate that managerial ability is positive related to bank lending. As an effort to check
for the robustness of the estimated results, we further estimate the relation between changes in managerial ability and changes in
bank lending. That is, we estimate the marginal effect of managerial ability on bank lending using the following specification:

LENDINGi, t = 0 + 1 MANAGERIAL ABILITYi, t + 1 BANK CHARACTERISTICSi, t

+ YEAR DUMMIES + BANK DUMMIES + it (4)

In this setting, we consider both the current and lagged one-year of the change in managerial ability and changes in bank controls
to mitigate endogeneity and to control for the fact that bank lending may not react immediately to the marginal effect of managerial
ability and other controls. Columns 1-2 of Table 4 reports the result of the marginal effect of managerial ability, whereas columns 3-4
shows the results of the lagged one-year of the change in managerial ability and other controls. Overall, the empirical results
described in Table 4 are consistent with those of the baseline model.

4. Loan Quality

So far, we have documented that more ably managed banks are capable of generating more loans. However, it is still unclear how
managerial ability affects loan quality. Thus, we extend our analysis and examine the impact of managerial ability on the quality of
loan. Our proxies for loan quality are NONPERFORMING LOANS (measured as the ratio of total nonperforming loans to total loans)
and NONPERFORMING ASSETS (measured as the ratio of total nonperforming assets to total assets). Table 5 provides the estimation
results of the models to estimate the impact of managerial ability on loan quality. Column 1 reports the result when NONPERFO-
RMING LOANS is used as the dependent variable, whereas the result of the model when NONPERFORMING ASSETS is used as the
dependent variable is provided in Column 2. As can be seen from the table, the estimated coefficients on MANAGERIAL ABILITY are
negative and significant in both the models and this indicates that higher managerial ability is associated with better loan quality (i.e.
lower nonperforming loans and lower nonperforming assets).

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X.V. Vo, et al. Finance Research Letters xxx (xxxx) xxxx

Table 4
Change in managerial ability and change in bank lending.
ΔLENDING ΔLENDING (lag of all right-hand-side variables)
(1) (2)

ΔMANAGERIAL ABILITY 0.539*** 0.461***

(0.069) (0.106)
ΔSIZE 0.858*** -0.030**
(0.010) (0.013)
ΔAGE -0.037 0.561***
(0.055) (0.100)
ΔINTANGIBLE -1.588*** 0.440**
(0.155) (0.217)
ΔCAPITAL 0.592*** -0.170*
(0.068) (0.095)
ΔDEPOSIT GROWTH -0.030*** 0.007
(0.004) (0.006)
ΔPROVISION 0.047*** -0.074***
(0.003) (0.004)
ΔLABOR 0.139*** 0.028**
(0.008) (0.012)
CONSTANT 0.030*** 0.105***
(0.003) (0.005)
Year FEs YES YES
Bank FEs YES YES
R-squared 0.672 0.076
Observations 71,307 61,372

Note: Robust standard errors are in parentheses.

***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively.

Table 5
The effects of managerial ability on loan quality.
NONPERFORMING LOANS NONPERFORMING ASSETS
(1) (2)

MANAGERIAL ABILITY -40.175*** -38.378***

(2.163) (1.972)
SIZE 1.554*** 1.396***
(0.114) (0.099)
AGE 0.757*** 0.797***
(0.110) (0.106)
INTANGIBLE -3.943** -4.466***
(1.607) (1.435)
CAPITAL -1.014 -1.587*
(0.942) (0.828)
DEPOSIT GROWTH -0.514*** -0.551***
(0.063) (0.054)
PROVISION 2.403*** 2.201***
(0.079) (0.072)
LABOR -2.559*** -2.331***
(0.173) (0.155)
CONSTANT 20.139*** 19.548***
(1.526) (1.346)
Year FEs YES YES
Bank FEs YES YES
R-squared 0.351 0.406
Observations 71,017 71,297

Note: Robust standard errors are in parentheses.

***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively.

5. Robustness Tests

In this section, we provide a number of robustness tests on our basic results and provide the results in Table 6. First, we calculate
bank efficiency and managerial ability using nonparametric (i.e. DEA) approach rather than parametric (i.e. SFA) approach and
report the results in Column 1. Second, we evaluate bank efficiency managerial ability using profit efficiency and report the result in
Column 2. In Column 3, we re-estimate Eq. 3 using pooled OLS estimators. The result using random effects estimators is reported in
Column 4. As additional efforts to check for the robustness of the estimated results, we further re-evaluate Eq. 3 using dynamic two-

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 X.V. Vo, et al.

Table 6
Robustness tests.
Alternative Managerial Ability Alternative Managerial Ability Measure Alternative Model Specification: Alternative Model Specification: Alternative Model Specification: Two-
Measure (DEA Approach) (Profit Efficiency Approach) Pooled OLS Random Effects step System GMM
(1) (2) (3) (4) (5)

6
MANAGERIAL ABILITY 12.411*** 3.189*** 3.604*** 3.397*** 1.433***
(0.516) (0.902) (0.076) (0.089) (0.059)
Other Controls YES YES YES YES YES
Observations 71,307 71,307 71,307 71,307 83,506

Note: Robust standard errors are in parentheses.

***, **, and * indicate significance at the 1%, 5%, and 10% level, respectively.
Finance Research Letters xxx (xxxx) xxxx
X.V. Vo, et al. Finance Research Letters xxx (xxxx) xxxx

step system GMM panel estimators with appropriate lag length to control for the potential endogeneity bias. The result is reported in
Column 5. Overall, our basic results presented in Table 3 continue to hold.

6. Conclusion

The role of banks in providing credit to facilitate individuals and business activities has received special attention in the last few
years (Batten and Vo, 2019). However, little has been known on how managerial ability affect bank lending behavior, partly because
managerial ability is latent and unobservable.
In this paper, we elucidate how managerial ability may affect bank lending activities using a large sample comprising over 99,685
bank-year observations during the period 1990-2017. The evidence herein illustrates that banks run by more able managers use their
resources more efficiently than banks run by not-so-able managers and thus, they can produce higher amounts of loans and have
better loan quality. This result is homogenous across banks, regardless of their size and period of time.
Overall, our study contributes to the ongoing debate about the impact of managerial ability on bank behavior, especially in terms
of credit supply ability. It has implications for bank boards, regulators, and market participants – higher managerial ability con-
tributes to the capacity of banks to sustain lending. More importantly, more able managers can allocate bank resources in a cost-
effective manner, and thus they help banks to continue lending even during the crisis period and put banks in stronger positions to
expand their market share post-crisis time.

Supplementary materials

Supplementary material associated with this article can be found, in the online version, at doi:10.1016/j.frl.2020.101585.

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