Blockholder Board Representation and Debt Contracting

Abstract

We examine the impact of blockholder board representation on a borrower’s bank loan contract terms and find it is associated with lower spreads and fewer negative covenants. When examining the potential channels behind the relationship, we find that blockholder-directors who take dedicated monitoring roles, as opposed to the short-term or confrontational positions often associated with activist shareholders, drive the overall relationship. The findings, which are robust to alternative model specifications and explanations, suggest that blockholder-directors can serve as substitute monitors to debtholders when their incentives are aligned. The results also highlight the heterogeneity among blockholders who actively influence the management process. Accepted at Journal of Banking and Finance May 2022.

Keywords: Blockholders, cost of debt, debt covenants, shareholder activism, board composition

JEL Classification: G23, G32