The Effect of Corporate Board Characteristics on Loan Monitoring Decisions
31 Pages Posted: 25 Feb 2011
Date Written: February, 25 2011
Motivated by a paucity of research into the impact of corporate governance from a debtholder perspective, we examine the impact of corporate governance on loan monitoring decisions. The active and close involvement of a major UK bank facilitated the development of extremely realistic experimental scenarios with a great deal of accurate institutional detail. The results show that the likelihood of loan officers increasing the level of monitoring in the context of a debt covenant breach is associated with board independence, director financial expertise and the presence of a blockholder. The two-way interaction between financial expertise and board independence is also documented. Apart from extending the academic literature, this study provides empirical evidence on the efficacy of good corporate governance in reducing debt contracting costs that should also be of interest to regulators and practitioners.
Suggested Citation: Suggested Citation