Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-19T06:39:50.323Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Banks Price Independent Directors’ Attention?

Published online by Cambridge University Press:  23 May 2018

Henry He Huang ,
Gerald J. Lobo ,
Chong Wang  and
Jian Zhou
Get access Rights & Permissions [Opens in a new window]

Abstract

Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 4 , August 2018 , pp. 1755 - 1780
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank Paul Malatesta (the editor) and Ronald Masulis (associate editor and referee) for their many insightful and constructive suggestions. We thank Juan Qin for excellent research assistance and Miao Hu, Dengshi Huang, Joe Kerstein, Victor Wei Huang, Zhonggao Lin, Qianqiu Liu, Ghon Rhee, Tiesheng Zhang, Jun Zheng, Hongquan Zhu, Jia-nan Zhou, and the workshop participants at Anhui University of Technology, Southwest Jiaotong University, University of Hawaii at Manoa, and University of Kentucky for their helpful comments. Wang acknowledges the financial support from The Hong Kong Polytechnic University Start-Up Fund and the National Natural Science Foundation of China (Fund #71332008). Zhou gratefully acknowledges the research support from Lloyd Fujie / Deloitte Foundation Professorship and the summer research support from the Shidler College of Business at the University of Hawaii at Manoa.

References

Adams, R., and Ferreira, D.. “Do Directors Perform for Pay?” Journal of Accounting and Economics, 46 (2008), 154–171.Google Scholar
Altman, E. I.“Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.Google Scholar
Anderson, R. C.; Mansi, S. A.; and Reeb, D. M.. “Board Characteristics, Accounting Report Integrity, and the Cost of Debt.” Journal of Accounting and Economics, 37 (2004), 315–342.Google Scholar
Asquith, P.; Au, A.; Covert, T.; and Pathak, P.. “The Market for Borrowing Corporate Bonds.” Journal of Financial Economics, 107 (2013), 155–182.Google Scholar
Beasley, M.“An Empirical Analysis of the Relation between the Board of Director Composition and Financial Statement Fraud.” Accounting Review, 71 (1996), 443–465.Google Scholar
Becker, B., and Milbourn, T.. “How Did Increased Competition Affect Credit Ratings?” Journal of Financial Economics, 101 (2011), 493–514.Google Scholar
Bhojraj, S., and Sengupta, P.. “Effect of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and the Outside Directors.” Journal of Business, 76 (2003), 455–475.Google Scholar
Bolton, P., and Scharfstein, D.. “Optimal Debt Contracts and the Number of Creditors.” Journal of Political Economy, 104 (1996), 1–25.Google Scholar
Boubakri, N., and Ghouma, H.. “Control/Ownership Structure, Creditor Rights Protection, and the Cost of Debt Financing: International Evidence.” Journal of Banking and Finance, 34 (2010), 2481–2499.Google Scholar
Bradley, M., and Roberts, M.. “The Structure and Pricing of Corporate Debt Covenants.” Working Paper, University of Pennsylvania (2004).Google Scholar
Bushman, R., and Wittenberg-Moerman, R.. “The Role of Bank Reputation in ‘Certifying’ Future Performance Implications of Borrowers’ Accounting Numbers.” Journal of Accounting Research, 50 (2012), 883–930.Google Scholar
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.Google Scholar
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371–406.Google Scholar
Costello, A., and Wittenberg-Moerman, R.. “The Impact of Financial Reporting Quality on Debt Contracting: Evidence from Internal Control Weakness Reports.” Journal of Accounting Research, 49 (2011), 97–136.Google Scholar
Davydenko, S.; Strebulaev, I.; and Zhao, X.. “A Market-Based Study of the Cost of Default.” Review of Financial Studies, 25 (2012), 3573–3609.Google Scholar
Demiroglu, C., and James, C. M.. “The Information Content of Bank Loan Covenants.” Review of Financial Studies, 23 (2010), 3700–3737.Google Scholar
Dichev, I., and Skinner, D.. “Large-Sample Evidence on the Debt Covenant Hypothesis.” Journal of Accounting and Economics, 40 (2002), 1091–1123.Google Scholar
Drucker, S., and Puri, M.. “On Loan Sales, Loan Contracting and Lending Relationships.” Review of Financial Studies, 22 (2009), 2835–2872.Google Scholar
Ferris, S.; Jagannathan, M.; and Pritchard, A.. “Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments.” Journal of Finance, 58 (2003), 1087–1111.Google Scholar
Fich, E. M., and Shivdasani, A.. “Are Busy Boards Effective Monitors?” Journal of Finance, 61 (2006), 689–724.Google Scholar
Fields, P.; Fraser, D. R.; and Subrahmanyam, A.. “Board Quality and the Cost of Debt Capital: The Case of Bank Loans.” Journal of Banking and Finance, 36 (2012), 1536–1547.Google Scholar
Garcia Lara, J. M.; Garcia Osma, B.; and Penalva, F.. “Accounting Conservatism and Corporate Governance.” Review of Accounting Studies, 14 (2009), 161–201.Google Scholar
Graham, J.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 44–61.Google Scholar
Hermalin, B., and Weisbach, M.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 9 (2003), 7–26.Google Scholar
Huang, H.; Lobo, G. J.; Wang, C.; and Zhou, J.. “Attention Please: How Does Directors’ Uneven Attention among Multiple Directorships Affect Firms’ Earnings Management.” Working Paper, Yeshiva University, University of Houston, University of Kentucky, and University of Hawaii at Manoa (2014).Google Scholar
Ivashina, V., and Scharfstein, D.. “Bank Lending during the Financial Crisis of 2008.” Journal of Financial Economics, 97 (2010), 319–338.Google Scholar
Johnson, S. A.“Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage.” Review of Financial Studies, 16 (2003), 209–236.Google Scholar
Klein, A.“Audit Committee, Board of Director Characteristics, and Earnings Management.” Journal of Accounting and Economics, 33 (2002), 375–400.Google Scholar
Larcker, D.; Richardson, S.; and Tuna, A.. “Corporate Governance, Accounting Outcomes, and Organizational Performance.” Accounting Review, 82 (2007), 963–1008.Google Scholar
Li, N.“Negotiated Measurement Rules in Debt Contracts.” Journal of Accounting Research, 48 (2010), 1103–1144.Google Scholar
Mansi, S.; Maxwell, W.; and Miller, D.. “Analyst Forecast Characteristics and the Cost of Debt.” Review of Accounting Studies, 16 (2011), 116–142.Google Scholar
Masulis, R. W., and Mobbs, S.. “Independent Director Incentives: Where Do Talented Directors Spend Their Limited Time and Energy?” Journal of Financial Economics, 111 (2014), 406–429.Google Scholar
Masulis, R. W., and Mobbs, S.. “Independent Director Reputation Concerns.” Working Paper, University of New South Wales and University of Alabama (2015).Google Scholar
McMullen, D., and Raghunandan, K.. “Enhancing Audit Committee Effectiveness.” Journal of Accountancy, 182 (1996), 79–81.Google Scholar
Menon, K., and Williams, J. D.. “The Use of Audit Committee for Monitoring.” Journal of Accounting and Public Policy, 13 (1994), 121–139.Google Scholar
Qi, Y.; Roth, L.; and Wald, J.. “Political Rights and the Cost of Debt.” Journal of Financial Economics, 95 (2010), 202–226.Google Scholar
Qian, J., and Strahan, P.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 2803–2834.Google Scholar
Ryan, H., and Wiggins, R.. “Whose Is in Whose Pocket? Director Compensation, Board Independence, and Barriers to Effective Monitoring.” Journal of Financial Economics, 73 (2004), 497–524.Google Scholar
Sengupta, P.“Corporate Disclosure Quality and the Cost of Debt.” Accounting Review, 73 (1998), 459–474.Google Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.Google Scholar
Smith, C.“A Perspective on Accounting-Based Debt Covenant Violations.” Accounting Review, 68 (1993), 289–303.Google Scholar
Vafeas, N.“Board Meeting Frequency and Firm Performance.” Journal of Financial Economics, 53 (1999), 113–142.Google Scholar
Xie, B.; Davidson, W. N.; and Dadalt, P.. “Earnings Management and Corporate Governance: The Roles of the Board and the Audit Committee.” Journal of Corporate Finance, 3 (2003), 295–316.Google Scholar
Yermack, D.“Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–211.Google Scholar
Supplementary material: File

Huang et al. supplementary material

Huang et al. supplementary material 1

Download Huang et al. supplementary material(File)
File 787.3 KB