The Effect of Blockholder Board Representation on Debt Contracting
49 Pages Posted: 17 Jun 2019 Last revised: 19 Jun 2019
Date Written: June 5, 2019
I study the effect of a blockholder who sits on the board of directors on debt contracting. Theory suggests mixed effects of this condition on board quality as viewed by debtholders; blockholder-directors can simultaneously mitigate owner-manager conflicts and exacerbate shareholder-debtholder conflicts. I document that outside blockholders on the board are associated with a lower cost of debt, consistent with debtholders viewing them favorably. The effect appears driven by blockholder-directors who take long-term monitoring roles, as opposed to those with shorter or more adversarial aims. The evidence is also stronger when owner-manager conflicts are more severe. My research examines how lenders respond to a significant agency tension and suggests that a blockholder on the board has the potential to reduce the firm’s burden in borrowing.
Keywords: blockholders, board quality, cost of debt, blockholder-directors
JEL Classification: G23, G32
Suggested Citation: Suggested Citation