Monitoring By Affiliated Bankers on Board of Directors: Evidence from Corporate Financing Outcomes
69 Pages Posted: 21 Mar 2007
Date Written: November 15, 2006
Abstract
This paper investigates whether bank representation on corporate boards facilitates debt finance, using a hand-collected dataset on the boards of directors of large non-financial companies. The findings show that the presence of an executive from a bank that has an outstanding lending relationship with the company (i) increases the amount of debt in a company's capital structure via an increase in private debt, (ii) decreases the sensitivity of debt finance to the amount of tangible assets that a company holds, (iii) decreases the cost of borrowing, and (iv) reduces the covenants included in debt contracts. The main contribution of the paper to the extant literature is to present the first evidence for the banker-director, whose bank has a loan outstanding, performing a monitoring function on that company's board of directors.
Keywords: Banking Relationships, Board of Directors
JEL Classification: G21, G32, G34
Suggested Citation: Suggested Citation