The Effect of Blockholder Board Representation on Debt Contracting

55 Pages Posted: 17 Jun 2019 Last revised: 18 Jun 2020

See all articles by Blair B. Marquardt

Blair B. Marquardt

University of North Texas - Department of Accounting

Date Written: June 2020

Abstract

I examine the effect of blockholder board representation on a borrower’s terms of debt. I document an inverse relationship with both the variable interest rate and count of loan covenants, consistent with debtholders viewing blockholder-directors favorably. Despite being an inherently active strategy, this mechanism is frequently used by blockholders outside those typically studied as “activists.” In fact, those who take committed monitoring roles, rather than those with short-term or adversarial aims, drive the overall relationship. Collectively, the evidence suggests that blockholder-directors can serve as substitute monitors to debtholders when their incentives are aligned. This study highlights the importance of considering the heterogeneous incentives among blockholders, as well as identifying the specific mechanisms they employ.

Keywords: Blockholders, cost of debt, blockholder-directors, shareholder activism, board composition, agency theory

JEL Classification: G23, G32

Suggested Citation

Marquardt, Blair, The Effect of Blockholder Board Representation on Debt Contracting (June 2020). Available at SSRN: https://ssrn.com/abstract=3400811 or http://dx.doi.org/10.2139/ssrn.3400811

Blair Marquardt (Contact Author)

University of North Texas - Department of Accounting ( email )

G. Brint Ryan College of Business
1155 Union Circle #305219
Denton, TX 76203-5017
United States

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