Overlapping Board Connections with Banker Directors and Corporate Loan Terms: Evidence from Syndicated Loans

Abstract

I look at the relationship between corporate loan terms and connections of board members to bankers through employment on other boards, a connection less likely to be affected by confounding factors. Specifically, I examine whether loan terms such as pricing and maturity as well as other loan characteristics such as whether loan terms require secured tranches and whether loans are leveraged or not are affected by professional connections to bankers. Using syndicated loan data, I find that firms connected to bankers via other boards are more likely to borrow, and they receive cheaper pricing. However, maturity of loans is not different between the two groups. I further examine whether these results were different during the most recent 2007-2008 global financial crisis. Results show that loan availability declined during the financial crisis for all firms but connected firms continued to borrow. With respect to loan pricing, during the crisis, firms with overlapping professional connections continued to receive lower spreads. However, loan maturities during the crisis period do not show a differential effect for firms with connections. Overall, results suggest support for the importance of social connections in decreasing information asymmetry and reducing transaction costs between lenders and borrowers.

Keywords: Board of Directors, Social Networks, Syndicated Loans, Bank Lending, Lending Outcomes, Asymmetric Information

JEL Classification: G21, G31, G32, G34, L14, L25