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Bank Relations and Borrower Corporate Governance and Incentive Structures

47 Pages Posted: 31 Aug 2017  

Carlo Maria Gallimberti

Boston College

Richard A. Lambert

University of Pennsylvania - Accounting Department

Jason J. Xiao

University of Rochester - Simon Business School

Date Written: August 30, 2017

Abstract

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

Suggested Citation

Gallimberti, Carlo Maria and Lambert, Richard A. and Xiao, Jason J., Bank Relations and Borrower Corporate Governance and Incentive Structures (August 30, 2017). Available at SSRN: https://ssrn.com/abstract=3029930

Carlo Maria Gallimberti

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Richard Lambert (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-7782 (Phone)
215-573-5463 (Fax)

Jason Xiao

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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