Bank Relations and Borrower Corporate Governance and Incentive Structures
47 Pages Posted: 31 Aug 2017
Date Written: August 30, 2017
This paper examines the use of governance and incentive mechanisms beyond loan contract provisions that borrowers use to reduce contracting costs with lenders. We show that as the strength of the relationship between a borrower and a lender intensifies over time, borrowing firms are more likely to elect bank employees to their boards of directors, apply corporate governance structures that insulate managers from turnover, decrease managers’ risk-taking incentives, and increase information asymmetries with non-bank capital providers. Interestingly, many of the adopted governance and incentive mechanisms are commonly thought to decrease shareholder wealth outside intense bank-firm relations. Our results highlight the importance of context in assessing the costs and benefits of governance and incentive structures.
Keywords: relationship lending, interlocks, entrenchment, equity incentives, information asymmetry, corporate governance
JEL Classification: G21, G32, G34, D82
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