Creditor Control Rights and Board Independence
London School of Economics - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)
Miguel A. Ferreira
Nova School of Business and Economics; European Corporate Governance Institute (ECGI)
November 6, 2015
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 443/2014
We find that the number of independent directors on corporate boards increases by about 24% following violations of financial covenants in bank loans. This change in board composition appears to be a response to a shift of control rights in favor of creditors following covenant violations. By contrast, financial distress and poor financial performance at the time of covenant violations do not appear to explain the results. We conclude that board composition endogenously responds to changes in the allocation of control rights.
Number of Pages in PDF File: 57
Keywords: Corporate boards, Corporate governance, Covenant violations, Creditor intervention
JEL Classification: G21, G32, G33, G34
Date posted: March 15, 2012 ; Last revised: November 13, 2015
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