Open AccessThe effect of corporate board characteristics on loan monitoring decisions
Author(s) -
Judy Day,
Paul R. Mather,
Peter Taylor
Publication year - 2014
Publication title -
corporate ownership and control
Language(s) - English
Resource type - Journals
eISSN - 1810-0368
pISSN - 1727-9232
DOI - 10.22495/cocv11i2p4
Subject(s) - corporate governance , loan , covenant , accounting , business , context (archaeology) , debt , independence (probability theory) , corporate finance , finance , political science , paleontology , statistics , mathematics , law , biology
Motivated by a paucity of research into the impact of corporate governance from a debtholder perspective, we examine the impact of corporate governance on loan monitoring decisions. The active and close involvement of a major UK bank facilitated the development of extremely realistic experimental scenarios with a great deal of accurate institutional detail. The results show that the likelihood of loan officers increasing the level of monitoring in the context of a debt covenant breach is associated with board independence, director financial expertise and the presence of a blockholder. A two-way interaction between financial expertise and board independence is also documented. Since likelihood of debt covenant breaches continues to be an important variable in studies of accounting choice and corporate finance the paper provides insights into associated debt contracting costs and their determinants. Apart from extending the academic literature, this study provides additional evidence on the efficacy of good corporate governance in reducing debt contracting costs that should also be of interest to regulators and practitioners