Board Quality and the Cost of Debt Capital: The Case of Bank Loans
L. Paige Fields
Donald R. Fraser
Texas A&M University - Department of Finance
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
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
Date posted: April 17, 2010 ; Last revised: November 16, 2011
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