Cross-Monitoring and Corporate Governance

49 Pages Posted: 6 Jul 2006

See all articles by Joanna Shepherd

Joanna Shepherd

Emory University School of Law

Frederick Tung

Boston University School of Law

Albert Yoon

University of Toronto - Faculty of Law

Date Written: April 27, 2007


We take the view that corporate governance must involve more than corporate law. Despite corporate scholars' nearly exclusive focus on corporate law mechanisms for controlling managerial agency costs, shareholders are not the only constituency concerned with such costs. Given the thick web of firms' contractual commitments, it should not be a surprise that other financial claimants may also attempt to control agency costs in their contracts with the firm. We hypothesize that this cross-monitoring by other claimants has value for shareholders.

We examine bank loans for empirical evidence of the value of cross-monitoring. Our approach builds on prior empirical work on the value of good corporate governance, to which we add data on the presence of bank loans and their interactions with free cash flow, governance indices, and individual corporate governance provisions. To our knowledge, ours is the first study to measure the performance effects of bank debt as a device for reducing managerial agency costs, and the first study on the interaction of ongoing bank monitoring with corporate governance arrangements. We find strong evidence that bank monitoring adds value. In effect, bank monitoring can counteract somewhat the value-decreasing effects of managerial entrenchment. Bank monitoring may substitute for good corporate governance.

Keywords: corporate governance, corporate governance index, agency costs, entrenchment, bank monitoring, bank loan, free cash flow

JEL Classification: G30, G34, K22, G21

Suggested Citation

Shepherd, Joanna and Tung, Frederick and Yoon, Albert, Cross-Monitoring and Corporate Governance (April 27, 2007). Available at SSRN: or

Joanna Shepherd

Emory University School of Law ( email )

1301 Clifton Road
Atlanta, GA 30322
United States
404-727-8957 (Phone)

Frederick Tung (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Albert Yoon

University of Toronto - Faculty of Law ( email )

78 and 84 Queen's Park
Toronto, Ontario M5S 2C5

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