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Board corruption and loan contracts

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  • Robin Chen
  • Chia‐Wei Huang
  • Chih‐Yung Lin

Abstract

In this study, we examine the effects of board corruption on the financing costs of firms. We construct an index of perceived corruption that uses the average level of corruption that is linked to a director's surname. The evidence shows that lending banks attach higher spreads and stricter covenants to the loan contracts of firms with high perceived board corruption. Specifically, when the perceived board corruption increases after mergers and acquisitions, firms are charged higher loan spreads. Further analysis shows that the effects of board corruption on financing costs become stronger when firms have weak governance mechanisms. These results show that banks recognize board corruption as a source of agency problem with borrowers when they make lending decisions.

Suggested Citation

  • Robin Chen & Chia‐Wei Huang & Chih‐Yung Lin, 2022. "Board corruption and loan contracts," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(9-10), pages 1929-1956, October.
    • Handle: RePEc:bla:jbfnac:v:49:y:2022:i:9-10:p:1929-1956
    DOI: 10.1111/jbfa.12604
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