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Creditor control rights and board independence

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  • Ferreira, Daniel
  • Ferreira, Miguel A.
  • Mariano, Beatriz

Abstract

We find that the number of independent directors on corporate boards increases by approximately 24% following financial covenant violations in credit agreements. Most of these new directors have links to creditors. Firms that appoint new directors after violations are more likely to issue new equity, and to decrease payout, operational risk and CEO cash compensation than firms without such appointments. We conclude that a firm’s board composition, governance, and policies are shaped by current and past credit agreements.

Suggested Citation

  • Ferreira, Daniel & Ferreira, Miguel A. & Mariano, Beatriz, 2018. "Creditor control rights and board independence," LSE Research Online Documents on Economics 84463, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:84463
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    File URL: http://eprints.lse.ac.uk/84463/
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    References listed on IDEAS

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    1. Cem Demiroglu & Christopher M. James, 2010. "The Information Content of Bank Loan Covenants," The Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3700-3737, October.
    2. Greg Nini & David C. Smith & Amir Sufi, 2012. "Creditor Control Rights, Corporate Governance, and Firm Value," The Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1713-1761.
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    Cited by:

    1. Lin, Luca X., 2022. "Taking no chances: Lender concentration and corporate acquisitions," Journal of Corporate Finance, Elsevier, vol. 76(C).
    2. Ambrocio, Gene & Colak, Gonul & Hasan, Iftekhar, 2022. "Commitment or constraint? The effect of loan covenants on merger and acquisition activity," Finance Research Letters, Elsevier, vol. 47(PB).
    3. Wenlian Gao & Feifei Zhu & Kai Chen, 2023. "The role of bank lenders in firm leverage adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 63-97, February.
    4. Zhiming Ma & Derrald Stice & Christopher Williams, 2022. "What's my style? Supply‐side determinants of debt covenant inclusion," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(3-4), pages 461-490, March.
    5. Bonfim, Diana & Custódio, Cláudia & Raposo, Clara, 2023. "Supporting small firms through recessions and recoveries," Journal of Financial Economics, Elsevier, vol. 147(3), pages 658-688.
    6. Bhagat, Sanjai & Bolton, Brian, 2019. "Corporate governance and firm performance: The sequel," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 142-168.
    7. Marc Arnold & Ramona Westermann, 2023. "Debt Renegotiations Outside Distress," Review of Finance, European Finance Association, vol. 27(4), pages 1183-1228.
    8. Saiying Deng & Yutao Li, 2023. "Creditor control rights and borrower protection: the role of borrower consent clause in private debt contracts," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 357-394, July.
    9. McGuinness, Paul B., 2021. "Board member age, stock seasoning and the evolution of capital structure in Chinese firms," International Business Review, Elsevier, vol. 30(3).
    10. Diana Bonfim & Cláudia Custódio, 2021. "The sensitivity of SME’s investment and employment to the cost of debt financing," Working Papers w202115, Banco de Portugal, Economics and Research Department.
    11. Campello, Murillo & Connolly, Robert A. & Kankanhalli, Gaurav & Steiner, Eva, 2022. "Do real estate values boost corporate borrowing? Evidence from contract-level data," Journal of Financial Economics, Elsevier, vol. 144(2), pages 611-644.
    12. Filippo Mezzanotti, 2021. "Roadblock to Innovation: The Role of Patent Litigation in Corporate R&D," Management Science, INFORMS, vol. 67(12), pages 7362-7390, December.
    13. Haotian Xiang, 2019. "Time Inconsistency and Financial Covenants," 2019 Meeting Papers 63, Society for Economic Dynamics.
    14. Stefano Colonnello & Michael Koetter & Moritz Stieglitz, 2021. "Benign Neglect Of Covenant Violations: Blissful Banking Or Ignorant Monitoring?," Economic Inquiry, Western Economic Association International, vol. 59(1), pages 459-477, January.
    15. Carolina Caetano & Gregorio Caetano & Hao Fe & Eric R. Nielsen, 2021. "A Dummy Test of Identification in Models with Bunching," Finance and Economics Discussion Series 2021-068, Board of Governors of the Federal Reserve System (U.S.).
    16. Brian Akins & David De Angelis & Maclean Gaulin, 2020. "Debt Contracting on Management," Journal of Finance, American Finance Association, vol. 75(4), pages 2095-2137, August.
    17. Reza, Syed Walid, 2020. "Profit skimming, asymmetric benchmarking, or the effects of implicit incentives? Evidence from natural disasters," Journal of Multinational Financial Management, Elsevier, vol. 57.
    18. Ernest Ezeani & Rami Salem & Frank Kwabi & Khalid Boutaine & Bilal & Bushra Komal, 2022. "Board monitoring and capital structure dynamics: evidence from bank-based economies," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 473-498, February.
    19. Lin, Luca Xianran, 2022. "Great Trees are Good for Shade: Creditor Monitoring Under Common Ownership," Finance Research Letters, Elsevier, vol. 44(C).
    20. Nicole Black & Danusha Jayawardana & Gawain Heckley, 2023. "Children’s Time Allocation and the Socioeconomic Gap in Human Capital," Papers 2023-06, Centre for Health Economics, Monash University.
    21. Keil, Jan, 2023. "Lending relationships when creditors are in control," Journal of Corporate Finance, Elsevier, vol. 79(C).
    22. Ivy Hawah Taana & Valliappan Raju, 2020. "Preliminary Investigations into the Factors Affecting Successful Implementation of Project Management Frameworks and its Effects on Project Success: Evidence from Ghana," International Journal of Business and Administrative Studies, Professor Dr. Bahaudin G. Mujtaba, vol. 6(5), pages 247-264.
    23. Ersahin, Nuri & Irani, Rustom M. & Le, Hanh, 2021. "Creditor control rights and resource allocation within firms," Journal of Financial Economics, Elsevier, vol. 139(1), pages 186-208.

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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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