Credit and Punishment: Are Corporate Bankers Disciplined for Risk-Taking?

This study examines the role of career incentives and risk management in the privately placed debt market. In particular, we examine the career path of corporate bankers underwriting syndicated loans. We construct a comprehensive dataset containing the identities and employment histories of nearly 1,500 loan officers employed in approximately 100 major U.S. corporate banking departments from the period spanning 1994 to 2012. Our findings indicate that a negative credit shock from their borrower base increases the relative likelihood that a loan officer departs the firm by roughly 50%. Furthermore, these officers experience worse career outcomes and lower promotion rates upon departure. Past negative credit events are also associated with stricter future loan contracts issued by affected loan officers (i.e., more covenants and greater covenant strictness).