Do Banks Care about CEO’s Influence on Director Appointment?

Wang, Jing
Zhang, Ning
Zhao, Sha
Zhou, Jian
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We study the effect of CEO’s influence in the board of directors’ appointment on bank loans. Theory offers two competing hypotheses: the “management hegemony” and the “informative advising” hypotheses. Using a sample of bank loans from 1996 to 2012, we document a positive relation between board co-option and loan spreads, consistent with more co-opted boards having less effective monitoring. Our cross-sectional tests reveal that the effect of board co-option on the cost of bank loans is more pronounced for firms that have longer CEO tenures and firms that have CEO at the same time being the board chairperson. To further identify causality, we exploit the change in the listing requirement by NASDAQ and NYSE. We find that loan spreads are significantly higher when the board co-option measure increases due to the new listing requirement in NASDAQ and NYSE. We also find that more co-opted boards are associated with higher likelihood of collateral requirement, higher number of covenants and financial covenants, and higher covenants intensity. We further find that more co-opted boards are associated with worse credit ratings. Our findings are consistent with the “management hegemony” hypothesis that bank loans are more costly when internal monitoring is less effective in co-opted boards.
Board of directors, Co-option, Loan spreads, Collateral, Covenants
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