Boards’ Corruption Culture and Bank Loan Contracts
46 Pages Posted: 9 Jul 2019
Date Written: October 1, 2018
This paper investigates the impacts of board’s corruption culture on the financing costs of firms. Evidence shows that lending banks attach higher loan spreads, higher total costs of borrowing, and stricter covenants to firms with a strong corruption culture in their boards. The results are robust to controlling for the endogenous matching between firms and boards using a variety of econometric techniques. We further document that the effect of the board’s corruption becomes stronger when firms have weak governance mechanisms. Our paper suggests that banks recognize board’s culture of corruption as a sort of agency problem when they make lending decisions.
Keywords: Board corruption culture, bank loan spread, corporate governance, financing cost, agency problem.
JEL Classification: G21, G32, G34
Suggested Citation: Suggested Citation