Bank Debt and Corporate Governance (original) (raw)
Related papers
Design of Corporate Governance: Role of Ownership Structure, Takeovers, and Bank Debt
SSRN Electronic Journal, 2000
We examine how different economies would design an optimal corporate governance system structured from three of the main mechanisms of corporate governance (managerial ownership, monitoring by banks, and disciplining by the takeover market). We allow for interactions among the mechanisms. The first set of results characterizes the combination of governance mechanisms that can appear in any optimally designed structure: 1) when monitored debt appears in an optimal system it is accompanied by concentrated ownership, and 2) when takeovers appear in an optimal system they are accompanied by diffuse ownership. We show that out of the numerous governance structures that could arise from combinations of the governance mechanisms, only three are candidates for an optimal system. These three endogenously derived governance structures match the prevalent systems (family based, bank based and market based) in the world. The optimal system for a given economy is characterized as a function of the degrees of development of its financial institutions and markets. Our analysis yields several testable implications. 1 We are grateful for comments and discussions to
Bank financing and corporate governance
Journal of Corporate Finance, 2014
Extant literature suggests that bank monitoring improves corporate governance. This paper demonstrates that inefficiency in banking can also significantly reduce the equity capital markets" disciplinary power. Specifically, we show that in an environment in which the banking system is dominated by inefficient state-owned banks, controlling shareholders" tunneling activity is positively associated with firms" bank loan access. This relation is particularly strong in firms with high borrowing capacity, as measured by tangibility, and in regions where the banking industry is severely inefficient. As firms with high tunneling can continue to receive new loans with interest cost compatible to others, equity capital market disciplinary forces do not apply to them. Indeed, we further show that through tunneling, bank financing is negatively associated with future firm performance. These results suggest that, for an economy to develop mature capital markets, it is imperative to improve banking efficiency because its inefficiency dilutes the monitoring role of the market.
Managerial Finance, 2008
We compare the determinants of the corporate debt ownership structure in a bank-oriented economy (Germany) and market-oriented economy (UK). The results, that are controlled for endogeneity, simultaneity and measurement errors, show that the firms in both countries adjust their debt ownership structure towards their target levels -British firms being the swifter. The evidence supports the predictions of the liquidation and renegotiation, and the flotation cost hypotheses in both countries. However, the moral hazard and adverse selection hypothesis receives support only in the UK. Moreover, the influence of market related factors on the choice of the lender is country dependent. Overall, the debt ownership structure of a firm is influenced by both the firm-specific factors and the financial traditions in which the firm operates.
Do banks influence the capital structure choices of firms
Erasmus Research Institute …, 2004
This paper investigates three capital structure decisions -leverage, debt maturity and the source of debt -in a simultaneous setting. Moreover, we investigate whether these choices are influenced by the involvement of banks in a firm. Our results based on a panel of Dutch firms show that bank relationships, measured by interlocking board memberships and equity ownership, have a significant impact on the relations among the three capital structure choices. First, less bank involvement strengthens the positive impact of leverage on maturity. This is consistent with the liquidity risk theory, because involved banks help firms to mitigate liquidity risk. Second, bank debt negatively effects leverage in firms with bank interlocks, while this relation is absent in firms without such bank involvement. This result suggests that banks maximize the value of their loans by reducing overall leverage. Third, we find a strong trade-off between bank debt and maturity, which is independent of the degree of bank involvement.
When Banks are Insiders: Evidence from the Global Syndicated Loan Market
SSRN Electronic Journal, 2007
Banks play a role in the corporate governance of firms in addition to acting as debt financiers around the world. Banks can have additional control over the borrowing firms by representation on its board of directors or being a shareholder through direct equity stakes or indirectly through holdings by the bank's fund management divisions. We investigate the effects of these bank-firm connections on the global syndicated loan market. We find that banks are more likely to act as lead arrangers in loans for firms where banks have control rights. Additionally, we find that banks charge higher interest rate spreads and face less credit risk after origination when they lend to these closely connected firms. Our findings suggest that the influence of banks over firms' governance seems to accrue mostly to the banks' benefit.
Bank loans and banks’ corporate control: evidence for Portugal
2011
Banks' corporate control of fi rms is likely to increase the likelihood of providing a future loan as it mitigates information asymmetry and agency costs of debt. Using a sample of retail loans to Portuguese fi rms, we fi nd that a bank corporate control enhances the probability of providing a future loan by 10 percentage points relative to a relationship lender with no control. This fi nding is robust to the inclusion of many fi rm-level controls and to instrumental variable methods to correct for the potential endogeneity of banks' equity stakes in borrower fi rms. The effect is lower when the borrower has multiple lending relationships or multiple banks as shareholders. Our results suggest that banks' corporate control affect the choice of the lender in the corporate loan market. * The opinions expressed are those of the authors and not necessarily those of Banco de Portugal or the Eurosystem. Any errors and omissions are the sole responsibility of the authors.
Bank Information Monopolies and the Mix of Private and Public Debt Claims
The Journal of Finance, 1996
This article examines the determinants of the mix of private and public debt using detailed information on the debt structure of 250 publicly traded corporations from 1980 through 1990. We find that the relationship between bank borrowing and the importance of growth opportunities depends on the number of banks the firm uses and whether the firm has public debt outstanding. For firms with a single bank relationship, the reliance on bank debt is negatively related to the importance of growth opportunities. In contrast, among firms borrowing from multiple banks, the relationship is positive.
The Quarterly Review of Economics and Finance, 2012
This paper examines how the number of banking relationships affects the interaction between managerial ownership and firm performance, and sheds light on the conditions under which banking relationships play a role in alleviating shareholder-manager conflicts. Our results provide several interesting insights. We document that bank monitoring has substantial value when managers are improperly incentivized, but that it becomes less important when managers are properly incentivized. There is a substitution effect between the value-increasing benefits of managerial ownership and bank monitoring. We also find that any existing free-riding concerns from having too many banking relationships are problematical only when Tobin's Q is high and managerial ownership is high. Published by Elsevier B.V. on behalf of The Board of Trustees of the University of Illinois.
Corporate governance and recent consolidation in the banking industry
Journal of Corporate Finance, 2000
Using the universe of publicly traded banks at year-end 1993, we find that target banks' outside directors, but not inside directors, tend to own more stock than their counterparts in other banks. Having an outside blockholder is also associated with banks becoming targets. In contrast to existing research on industrial firms, board structure does not help determine which sample banks sell. Neither the fraction of outsiders on a bank's board nor having an outside-dominated board differentiate the target banks in our sample. Instead, outside directorsrshareholders and blockholders appear to be primarily responsible for encouraging bank managers to accept an attractive merger offer q 2000 Elsevier Science B.V. All rights reserved. JEL classification: G21; G34