The Effect of Blockholder Board Representation on Debt Contracting
55 Pages Posted: 17 Jun 2019 Last revised: 18 Jun 2020
Date Written: June 2020
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: Suggested Citation