Abstract

http://ssrn.com/abstract=1590298
 
 

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Board Quality and the Cost of Debt Capital: The Case of Bank Loans


L. Paige Fields


Trinity University

Donald R. Fraser


Texas A&M University - Department of Finance

Avanidhar Subrahmanyam


University of California, Los Angeles (UCLA) - Finance Area; Centre for International Finance and Regulation (CIFR)

June 1, 2010

Mays Business School Research Paper No. 2011-3

Abstract:     
We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms with higher quality boards and even a single (non-insider) advisory board member borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection as well as the size and financial characteristics of the borrower and of the loan. We also show that board quality and other governance characteristics influence the likelihood that loans will have covenant requirements, but the relations differ by covenant type. Firms with high quality boards are less likely to have loans with financial ratio restrictions, but the firms are more likely to have such restrictions if they have high institutional ownership. Firms with greater diversity on the board are less likely to have collateral requirements, though these covenants are more likely when CEO cash compensation and institutional ownership are high or when the percentage of incentive-based pay or investor protection are low. Overall, the quality of the board plays an important role in lowering the cost of debt.

Number of Pages in PDF File: 41

Keywords: Board of directors, bank loans, cost of capital

JEL Classification: G21, G3, G32

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Date posted: April 17, 2010 ; Last revised: November 16, 2011

Suggested Citation

Fields, L. Paige and Fraser, Donald R. and Subrahmanyam, Avanidhar, Board Quality and the Cost of Debt Capital: The Case of Bank Loans (June 1, 2010). Mays Business School Research Paper No. 2011-3. Available at SSRN: http://ssrn.com/abstract=1590298 or http://dx.doi.org/10.2139/ssrn.1590298

Contact Information

L. Paige Fields
Trinity University ( email )
One Trinity Place
San Antonio, TX TX 78209
United States
2109997281 (Phone)

Donald R. Fraser
Texas A&M University (TAMU) - Department of Finance ( email )
430 Wehner
College Station, TX 77843-4218
United States
979-845- 2020 (Phone)
Avanidhar Subrahmanyam (Contact Author)
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)
Centre for International Finance and Regulation (CIFR) ( email )
Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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