Corporate Boards and Bank Loan Contracting

Abstract

This paper investigates the role of corporate boards in bank loan contracting. We find that when corporate boards are more independent, both price and non-price loan terms - e.g., interest rates, collateral, covenants and performance pricing- are more favorable and syndicated loans comprise more lenders. Board size, diversity, tenure, age, audit committee structure and other board characteristics also influence bank loan price. However they do not consistently affect all non-price loan terms except for audit committee independence. Moreover, the impact of corporate boards on bank loans varies with borrower characteristics such as leverage, tangibility and anti-takeover environment, and loan characteristics such as loan type and loan structure. Overall, our study provides strong evidence that banks tend to reward the benefits of board monitoring in mitigating agency risk and information risk with more favorable loan contract terms.

Keywords: Bank loan contracting; Boards of directors; Corporate governance; Monitoring; SOX

JEL Classification: G21, G34